SIP Investment: 5 Steps to Select the Right Schemes: SIP investment schemes are the preferred choice among investors owing to their low risk, attractive and consistent returns. It helps you follow financial discipline in life while a fixed amount is invested regularly in the mutual fund scheme of your choice.
While there are several mutual funds schemes in the market, you should only invest in the ones that match your goals and risk appetite. You can learn from the common mistakes that other investors make to be on the right path while investing your money. If you are a novice investor and does not how much to invest in SIP, you can take help from financial advisors like FinEdge.
If you are interested in SIP but do not have a clear idea on which scheme to opt for, take a look at the following steps that will help you in selecting the right SIP investment scheme:
- Step 1: Know Your Investment Objective and Risk Tolerance
Before investing in any SIP investment scheme, you must first identify your investment objective.
Is your objective short-term current income or long-term capital gains? Is the money going to be used to purchase a house or car, or to fund your future retirement?
Identifying the objective is an essential step in zeroing in on the perfect investment scheme for you.
At the same time, you should also consider your risk tolerance. Would you prefer a conservative investment, or will you be okay with dramatic fluctuations in the value of your portfolio? Return and risk are directly proportional. Hence, it would be best if you balance your ability to tolerate risk against the desire for higher returns.
- Step 2: Know About Costs Involved
Mutual fund investment companies earn money by charging commissions and fees to investors. You need to understand the types of costs involved with an investment before making choosing a mutual fund scheme.
For instance, mutual fund companies usually charge a sales fee known as a load. When it is done at the time of purchase, it is called a front-end load fee. On the other hand, when it is done during the sale of an investment, it is known as a back-end load fee.
The more you know about these fees, the better you can plan to invest in the right instruments.
- Step 3: Assess the Investment Company and its Past Results
As is the case with any investment, it is essential to research the past results of the investment company in question. While doing this, there are certain questions you should ask:
- Did the investment company deliver results that were in sync with the market returns?
- Was a specific mutual fund more volatile than other major indices in India?
- Was there an abnormally high turnover that may impose tax liabilities and costs on you?
The answers to these questions can provide an insight into how a specific mutual fund scheme performed in the market. It will also help you in painting the picture of the firm’s past trends with relation to return and turnover.
- Step 4: Know About Diversification of Assets
SIP investment schemes give you the option to diversify your investments to reduce risk. You can invest in equity, debt, or hybrid funds or even across different asset classes. Diversifying assets allows you to spread your risk and increase chances of consistent returns.
It is worth remembering that diversification of assets is not about numbers, but investing across a range of asset classes with the help of mutual funds. Ask a financial advisor for help in understanding the benefit of having a diversified portfolio.
- Step 5: Choose Between Active Management vs Passive Management
Another critical aspect while choosing the right SIP investment scheme for yourself involves determining whether you want your scheme to be managed actively or passively.
Actively managed SIP investment funds have portfolio managers who call the shots regarding which assets and securities to include in the investment. They carry out intensive research on economic trends, assets, sectors, and macroeconomic trends while making investment decisions. These investments seek to outperform the benchmark index, depending on the type of fund.
Passively managed investments try and replicate the performance of the benchmark index. Also, they do not trade as much as actively managed investments.
It is crucial to understand the difference between these two fund management approaches as a part of your journey to become a long-term investor.
Selecting the Right SIP with a Financial Advisor
With the right selection of SIP investment plans, you can achieve your long-term goals. If you are looking to invest your hard-earned money in SIP investment schemes, consult renowned financial advisory firms.
When it comes to SIP, they will help you understand advantages of SIP at the ground level, such as long-term wealth creation, rupee cost averaging, a disciplined approach, and a compounding effect that will help you earn ‘returns on returns.’ Make sure you do not invest money in a hurry or solely based on peer recommendations.