Things You Need To Know Before Investing In Mutual Funds Through SIP

Defining your investment objective: It is easy to start investing in mutual funds through SIP. However, without a goal in sight, you might pause or stop your SIPs when the markets are down or redeem the money when a need arises. The better way to invest would be to earmark each SIP with a specific financial goal. Defining your financial goal not only helps you to remain calm during market downturns but also helps you resist impulsive withdrawals.

Figure your investment tenure/horizon: Once you determine your goals, the next important step is to determine the investment horizon. It is essentially the timeframe within which you aim to achieve your financial goals. The investment horizon will vary basis your financial goal. For example, if you want to buy a car in three years, this time frame becomes your investment horizon.?

Calculate your SIP Amount: The minimum investment amount to invest in a mutual fund through SIP is ? 500. This means that SIP is an extremely affordable investment option. However, you need to tailor your SIP amount to align with your goals and investment tenure. You can use a goal planner calculator to determine your SIP amount precisely. For instance, if your aim is to accumulate ? 20 lakhs within 5 years, then considering a 12% return, you have to invest ?25,000 per month through SIP.?

Risk tolerance: Many feel investing in mutual funds through SIP reduces risk. But the risk of your investments depends on the invested scheme. For instance, if you have invested in an equity fund, your risk will be higher in the short term. On the other hand, debt funds prioritise capital protection, making it less volatile than equity funds.?

Understand the different types of funds: Your SIP amount flows into a particular fund/s. Each fund be it equity, debt or hybrid funds has a unique risk profile. The fund of our choice should be in accordance our won risk profile. So, befir starting a SIP, it is better to understand the returns and risks? you can expect from the different type of? funds.??

Understand Units and NAV: When you invest in mutual funds, whether it is through SIP or lump sum investment, you get units of the mutual fund scheme. The price of one unit of a fund is called Net Asset Value (NAV). The NAV will depend on the total assets managed by the fund divided by the total number of units of the fund.?

Rupee cost averaging: The best part of investing in mutual funds through SIP is that you don’t have to worry about market conditions. As your SIP investment amount remains the same every month; so, when the market is down, you get more units of the fund and fewer units when the market is up. This helps to average out the cost of investing. This entire process is called rupee cost averaging. Eventually, as the market goes up, the value of the units and your overall investment will also go up.???

Various facilities: SIP comes with an array of facilities. You may increase the SIP amount every year with a top-up facility, pause SIP for a few months when in times of financial crisis, or stop SIP when needed. These facilities make SIP investment very convenient and ensure that you remain in sync with your goals.????

Review and Monitoring: Investing is a dynamic process and an on-time exercise. After investing, you need to regularly review your investments to make sure that your investments are aligned with your goals. You might need to rebalance your portfolio over time and increase or decrease your investments in certain funds.?

To conclude, SIP makes investing in mutual funds extremely easy and also encourages you to be disciplined and stay committed to your financial goals.