Making your first investment in mutual funds can prove to be overwhelming given the number of choices and decisions you have to make. But mutual funds can prove to be smart investments if you get proper guidance before investing.
When it comes to mutual funds, a Systematic Investment Plan (SIP)isa great alternative for first-time investors since it lets you generate good returns at lower investment risk. Depending on your income and financial objectives, you can invest a preset amount weekly, quarterly, monthly, or half-yearly for a certain period. Before you go ahead and do that, however, there are some essential dos and don’ts you should know about.
Here are the 7 dos you should know before choosing an SIP:
- Start investing as soon as possible to ensure you get the most out of it. Your chances of achieving your financial objectives increase faster with early SIP investments.
- Before investing in SIP mutual funds, you should set your financial objectives, investment amount, and time horizon. Choosing the right fund based on asset classes also requires careful consideration of your investment horizon.
- You can choose the mutual fund based on your tolerance for risk, your expectations for returns, and the amount of time you have to reach your financial goals. The ability of the fund manager to produce high returns, the firm’s track record, investment costs, the past success of the scheme, and other variables must all be compared to choose the best mutual fund scheme.
- The current and projected inflation rates must be considered when selecting an SIP. After considering the projected inflation over the investing period, you should determine the SIP amount to meet your financial goals.
- Before investing in mutual funds, you need to have a basic understanding of taxation. The amount invested in a lump payment or through SIPs has the same tax consequences.
- When choosing a mutual fund for an SIP, you should be aware of the fund’s expense ratio and any applicable entry and exit loads. Such fees can decrease the overall returns.
- Using an SIP calculator, you can evaluate the estimated returns from your SIP contributions. You can use the calculator to help figure out how much to invest each month in accumulating the corpus you want after your investing period.
7 don’ts you need to keep in mind before investing in an SIP:
- The markets are incredibly difficult to forecast, and you should not try to time the market. Simply keep regularly investing through your SIP regardless of the market situation as short-term market fluctuations will be ironed out over the long term.
- Do not invest in a mutual fund based on the opinions of your peers. Before investing your money, you should set a goal you want to meet and then invest accordingly.
- A return in the future is not guaranteed by past performance. The fact that the fund has produced positive returns over the previous few years does not ensure this trend will continue. Pick a fund that has performed successfully after considering its performance in various market scenarios.
- It is not a good strategy to sell your investments or stop making them before achieving your objectives. To benefit from the power of compounding, you need to continue the SIP and let your money stay invested for the entirety of the decided investment horizon.
- Do not panic-sell your mutual fund units or stop the SIP when the market is crashing. Through the SIP strategy of rupee-cost averaging, such market volatility is balanced out over the long term.
- Avoid having SIPs in too many mutual funds because doing so will expose your investment to the same underlying assets. Always strive for diversity. Invest in a plan that will enable you to produce consistent profits.
- Don’t start an SIP and simply forget about it. It’s important to review the performance of your mutual fund investments regularly and if a scheme is underperforming consistently, you can consider switching to another scheme to stay on track to meet your goals.
Wrapping up
SIPs help you invest consistently while exercising financial restraint. After reaching one financial goal, you may discontinue the SIP and redirect the funds to a new SIP for a different objective while considering your risk tolerance and return expectations.