Considering the current volatile markets, these days Mutual Fund SIPs are very popular amongst investors and also it provides flexibility very much keen on investing in Mutual Funds through SIPs i.e. Systematic Investment Plan, where a fix amount is deducted through your registered bank account and is invested in the desired Mutual Fund Scheme.
However, before one starts investment in SIPs, there are certain points which one should look into before starting an SIP.
Richvik presents a small article on things to keep in mind before starting a Mutual Fund SIPs.
How does a SIP work?
A Mutual Fund SIP enables the investor to invest on regular basis, a certain specific sum, into the selected in Mutual Fund Scheme. If the scheme so chosen is open ended and free of exit charges, the Investor is free to redeem them as and when desired.
However, before initiating your SIP, what one needs to look into is the amount that one wishes to invest, time horizon of investment, category of scheme to choose and whether the amount so chosen is enough to fulfill your financial goals.
Let us understand each of these points in details-
- Amount of Investment- Generally it is said that one should save and invest at least 30% of their income towards their future goals and requirements. This will ensure wealth accumulation for the investor in the long term. Also, it is important to note that your financial goals are in sync with your propensity to save and invest in the right investment vehicle.
- Goal Based Investments- Your financial goals are the purpose for your investments i.e. your Investment objective. Before you start investing it is important you define your goals like Retirement Goal, or vacation Goal and time limits for the same. Based on your investment horizon, you should choose the appropriate category of schemes.
- Type of Funds- Mutual Funds are broadly divided into three main category of funds, namely
- Equity Funds- Equity Mutual Funds invest more than 75% of their corpus into Equity/Stock Markets. They are considered to be high risk category of funds. However, in the long term period i.e. investment in Equity funds over 5-10 years have been as high as 15%-20%, compounded annually.
- Hybrid Funds- Hybrid Funds are the funds which are a mixture of Debt funds and Equity funds. They are considered as safer than Equity funds /and riskier than Debt funds. However, with the launch of Conservative hybrid funds, hybrid funds can be considered as safe as debt funds. The past performance of Hybrid funds have been around 10-15%. Hybrid funds have their resources allocated between equity markets and bond markets in various proportions.
- Debt Funds- Debt funds are considered as safe as Bank deposits, however the return on debt funds are slightly higher than bank FDs and has much lower tax impact on your gains if you stay invested in the same for a period above 3 years.
It is difficult to choose the right category of fund for one’s investment. It is always preferred to choose a financial planner and advisor, who will work for the best of your interest.
- Past performance of the funds- Before investing in a fund, it is important to review the past performance of the fund, and then estimate how the future returns shall be. Comparing past performances will tell you how strong or weak a fund is, and what is it’s correlation to market movements.
- Expense Ratio and Exit charges- Expense ratios comprise of management and administrative costs of the fund house, and are essentially a fund house’s annual fee for assets under management. It is important to check the expense ratio of the fund and compare it with peer funds. Even a minute difference of 0.5% in the expense ratio will hamper your growth in funds in the long run, by a good margin.
Exit charges are the charges levied by fund houses at the time of exit from mutual funds, if the investor exists before the exit load period. Say for instance, some mutual funds have a lock-in of 12 months from the date of investment. If your need of funds is within a short period of time, then you should avoid funds which have a Lock-in period.
- Fund House- A fund is said to be as good as its fund house. Before investing in a fund, it is important to understand the investment approach of fund house, schemes offered by them and the performances of the funds managed by the fund house. If the fund house takes wrong calls, the investor may have to suffer due to that.
These are some of the points that an investor needs to understand before initiating a SIP. They will help you take right decisions and also keep you aware of the performance of your investments.
Let us look at past performance of some of the best fund houses over a period of 15-20 years. Had you invested monthly SIP of 10,000 in top performing schemes of following fund houses, following would have been the results-
|Fund Name||Launch Year||Returns provided in following years||Amount Invested as SIP in the launch year||Total Amount invested||Value in 2018|
|HDFC Capital Builder Fund||1994||5.11||49.64||7.55||21.29||10,000||2,880,000||63,772,392|
|Tata India Tax Savings Fund||1996||18.16||46.41||4.62||21.66||10,000||2,640,000||45,470,829|
|Reliance Growth Fund||1995||16.65||64.76||4.13||20.72||10,000||2,760,000||48,183,340|
|ICICI Prudential Multicap fund||1994||8.62||47.51||4.61||18.81||10,000||2,880,000||43,186,511|
|Franklin India Prima Fund||1993||21.5||48.28||7.18||26.38||10,000||3,000,000||179,753,300|
Source: Economic Times.
Analysis: Looking at the above table, we can understand that had one started investment of Rs. 10,000 per month at the time of launch of the fund, and had they continued the investment till date, their investment would have resulted in a corpus of approximate 5 Crores.
We, at Richvik Wealth Advisory, provide end to end financial services to our client and ensure that we provide investment solutions which are most beneficial for our clients. We firmly believe in the principal of ‘Client First’ and ensure the fulfillments of your goals.
Also, we have a special product for all our clients, a SIP that provides insurance cover worth 100 times of your monthly SIP value.
To know more in investments in SIPs, Insurance SIP and start your investments feel free to contact us.