Take a SIP of financial security

Investment is a tricky turf, especially if you are a small investor. The first step towards making a wise investment is to know what you’re investing in, as well as gauging what kind of investor you are — ready to take risks, wanting to play it safe or open to indulging in a little adventure at times? Systematic Investment Plans, or SIPs as these are generally known, are mostly preferred by investors who like to make the most of the market momentum without putting everything on stake at one time. If you’ve been eyeing a SIP, here are a few pointers…

A SIP allows you to invest a fixed amount at regular intervals in mutual funds. Your investment is used to buy mutual fund units at the current NAV (Net Asset Value). NAV value can go up and down on a daily basis, so your contribution will purchase more units if the NAV value is down and less when it is up. Through this rupee-cost averaging, you are going to get better returns when the market goes up and this also serves as a buffer against market volatility, something which every small investor dreads.

Having clarity about your financial goals, however, is the first thing that you have to keep in mind before embarking on a SIP journey. This will help in selecting the right plan/fund. So, whether it is for funding your child’s education, saving for a home purchase or having a retirement plan, set the goal and time it accordingly.

The plan options

SIP calculators available these days are a helpful tool to put things in perspective and see how much returns your monthly investment will give you over a specified term. Flexibility is one of the major advantages that a SIP offers to a small investor. Besides the regular SIPs wherein a set amount is invested every month or quarter, there are other options like Flexi SIP, Step-up SIP, Perpetual SIP, etc.

Flexi SIP allows you to increase or decrease contributions based on market conditions or personal financial situations.

Step-up or top-up plans are ideal for youngsters at the beginning of their careers as they can increase their investments as their salary purse gets heavier. You can specify a set amount (say Rs 1,000 or Rs 5,000) or a percentage (10 or15 per cent) of increase in the contribution on an annual basis to get more benefit over the years.

A Perpetual SIP continues indefinitely, ensuring long-term wealth accumulation without a set end date.

Power of compounding

An investment in mutual fund SIP is ‘two’ good for a small investor as it has the benefit of compounding, as reinvestment of returns leads to further returns. Thus, the investment growth is accelerated.

The right tenure

Though SIPs are generally started keeping in mind long-term goals, according to market experts, a three to five-year window is a good one as the financial market changes fast and new plans offering better returns are introduced frequently. Adding a mix of short and long-term SIPs in your portfolio, thus, is a smart strategy as it allows financial liquidity, too, in case of emergency.

Optimum choice

The huge variety of plans available in the market can make decision-making a tough task for a beginner. The best game-plan is to keep your risk appetite in mind. Plans with more investment in equity funds offer higher growth, but the risk here is also high. Debt or hybrid funds offer more stability in returns. Also, check the performance of the fund in different market cycles and long-term performance. A look at the costs involved is also important. Some fund managers have a higher expense ratio, which can impact your returns in the long run.

Safe ground

Post office savings schemes are government-backed schemes for small investors with low risk appetite. Here, too, one can invest a stipulated amount every month. The interest rates are fixed and are revised according to government notifications. These are completely safe and offer guaranteed returns. There are different schemes for several investors such as new parents, senior citizens, farmers, etc. Public Provident Fund Account (PPF); Sukanya Samriddhi Account (SSA); Senior Citizens Savings Scheme Account (SCSS); National Savings Certificates (VIIIth Issue) (NSC); Kisan Vikas Patra (KVP) are some of the schemes that you can avail of.