How to make the most of your SIP
SIP or systematic investment plan is comparable to your bank recurring deposit. You invest an equal amount of money every month. Only for SIP, you will be investing in a mutual fund. There are no tenure restrictions for the SIP. You can do SIPs in equity funds that invest in stocks or debt funds that invest in debt instruments like government and corporate bonds. Sounds simple? It is easy to set up a SIP. Most people start a SIP and don’t bother about it. However, you can maximise the returns from your SIP by taking some steps. Here’s how to take advantage of your SIP.
Align it with your goals
Before you invest in a SIP, assign it to a financial goal. This will help you stay disciplined because you will want to reach the goal. Also, you will not be tempted to dip into the investment for any other purpose because you have earmarked the SIP for a particular purpose. For instance, for a short-term goal such as going on a vacation, SIPs in debt mutual funds are best suited and for long term goals such as your kid’s higher education, SIPs in equity funds are ideal.
If the SIP is goal oriented, you will know the exact timeline when you will need to encash the investment. It is easy to plan for your goals. Consider this: if you need Rs. 7 lakhs in 5 years, you would need to invest Rs. 8,571 if the equity markets are returning 12% every year and just about Rs. 7,903 if you get 15% every year. There are many SIP calculators for calculating the SIP amount needed for the goal.
Step up your SIP
Whenever you get a salary hike or when your lifestyle improves, ensure that you step up your SIP. This way you can ensure that your investment is in line with your standard of living. You can use a Top up SIP for this.
As your income goes up, you will be able to set aside a higher surplus for investing. A SIP Top up allows you to increase the monthly SIP investment amount periodically. You can specify this as a percentage or a fixed amount every year. The minimum amount is usually Rs. 500 and in multiples of Rs 500.
Let’s take an example. Let’s say you invest Rs. 5,000 every month and estimate that you will get 12% every year, you will have more than Rs. 45 lakhs in 20 years. How will this change if you use Top up SIP? If you top up your SIP investment by 10% every year, you can get that Rs. 45 lakhs in less than 16 years. So, you can achieve your goal 4 years earlier if you increase your SIP contribution by 10% every year.
By topping up your SIP, you can invest in the fund that you have already chosen, tackle rising inflation, reach your goals faster and align your investment to your standard of living.
Keep reviewing your funds
Just like exams are a way to measure your knowledge, review of your SIP will help you understand whether you invested in the best funds. You should keep a check on your SIPs at least once in 6 months to measure their performance. Continuous downfall in any of the funds will indicate the exit from that scheme and moves towards other funds or sector for a while.
Even if you did thorough research before choosing funds for SIP, you need to keep reviewing the funds. Check if they are performing in line with their peers. Ensure that they are doing better than the category average. If you find anything amiss, see if you should be switching funds. If you find it difficult to make an informed decision, a financial expert can help you. For instance, at Wealthzi, you get a financial dashboard to monitor and review your portfolio and insights into growing your portfolio value and net worth.
Book your profits
There are many times you might feel that your fund has gained a lot and you want to preserve those gains. You can use the Trigger facility in a SIP for this. This facility enables investors to set targets based on pre-specified date, price and index levels. For instance, you can use the trigger facility to request the fund house to transfer your profits to an income fund once your fund has given 20%.
You can request for a transfer even if your investment hits a pre-determined point on the downside. Suppose you don’t want a loss of more than 10% on your fund, you can ask the fund house for a transfer to the income scheme when the NAV falls to Rs.9 from Rs. 10.
You can also redeem your entire investment or transfer the full portion in any scheme after hitting a pre-specified target.
Don’t stop SIPs
To get the best return from your SIP, you shouldn’t stop your SIP until your financial goal that is linked to the SIP is reached. However, you could consider switching funds if the fund you are investing in, is underperforming. Compounding works only in the long run. So, stay invested for at least 3 or more years to gain from your SIPs.