Fundamental things to know about SIP

A Mutual Fund based SIP (Systematic Investment Plan) is a wonderful method for kick staring your investment odyssey as far as mutual funds is concerned. Some of the key features of Systematic Investment Plans include savings on a regular basis in tandem with compounding returns and rupee cost averaging. These contrive to make it a very lucrative option of investment. The following are some of the important things you should know about SIP mutual fund before treading on the path-

1. Discipline is inculcated by SIPs- These SIPs do not require any complicated and exclusive strategy for investing. They only involve regular deployment of the surpluses, which can be invested just as they become accessible. One can start an SIP in equity, balanced or debt fund.

2. SIP and one-time investment returns may vary- it is a myth that SIP returns will be higher in comparison to the return on a point-to-point basis and this is because of the staggered nature of the average investment cost. On the contrary, the returns from SIPs are influenced majorly through the volatility quotient of the asset class in question along with the return curve that points to the underlying movement of assets.

3. SIPs too need management- though you are committed to an SIP for a long period of time, you have to review its portfolio. It is wiser to review any changes of investment style, investment process and so on at regular periods preferably on an annual basis.

4. The tenor of the SIP should be lower than the horizon of the goal you have- Once around 50% of the tenor of your SIP has been taken care of, the risks are not majorly lowered by the incremental instalments. As a result, in case of a major slump/fall witnessed in the market while you are in the very final year of the tenor of your SIP, the total returns will stand affected as well.

5. Don’t stop your SIP when the markets correct- investors assign high probability to future-based or recent events which in turn, make them believe that the current trend, whether up or down, will continue. It is never advisable to stop your SIPs when the markets correct and you will be on your way to attaining your financial goal.

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