SIP in mutual funds and Diwali–what is the connection here?
Diwali being the festival of lights is an auspicious occasion for starting all things new. While we are setting different personal and professional goals, why not align our financial goals with the same?
Yes, and a Systematic Investment Plan or SIP in mutual funds can absolutely be our partner for this.
How to Light Up Your Portfolio
Here is a six-step guide to light up your portfolio with SIP mutual funds, this Diwali:
1. Define Your Goals
Setting up a portfolio with SIP in mutual funds starts with setting up your financial goals. It is essential that you identify your various financial goals and rank them in order of importance.
Next, you can segregate them into short-term, medium-term and long-term goals.
You can make sure that these goals are SMART (Specific, Measurable, Achievable, Relevant and Time-bound) in nature. This could help you choose the right funds and stay disciplined with your investments.
Here is a simple breakdown of goals into three time-based categories:
(a) Short-term Goals
These are typically achieved within a year or two, such as buying a new car or funding a vacation.
(b) Medium-term Goals
These take 3-5 years to accomplish, like saving for a down payment on a house or a child’s education.
(c) Long-term Goals
These are long-term aspirations, often spanning 10 years or more, such as retirement planning or wealth accumulation.
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Dividing your goals into categories can also help you better understand their importance in your life.
2. Calculate Your Investment Needs
So, if you know the current value of your goals, is it enough to start investing with SIP in mutual funds?
No, you need to also consider inflation. Inflation, the gradual increase in the price of goods and services over time, can significantly impact your financial goals. It can eat out the future value of your returns.
To accurately estimate the amount needed to achieve your goals, you can follow these steps:
Step 1: Determine Your Current Expenses
You can calculate your current expenses on your various short-term, medium term and long term financial goals.
Step 2: Factor in Inflation
Next, based on the historical data for inflation, you can zero-in on an average annual inflation percentage. This can be your expected inflation percentage that can add up to your goal value in an annual compounded manner.
Step 3: Adjust for Future Expenses
The final value of your financial goals at the end of your goals tenure would be a compounded inflation percentage added to your goal value.
Step 4: Use an Inflation Calculator
This process, indeed, would be a hassle. But don’t worry, an SIP calculator or financial goal calculator can help you estimate it with ease.
By considering inflation, you can ensure that your financial goals are realistic and adequately funded to meet your future needs.
Check out various calculators related to your financial goals and investments with Kuvera here.
3. Choose the Right Mutual Fund
Now that you have your financial goals, SIP amount and investment horizons handy, it’s time to get to the real deal.
Yes, it is time to compare funds and schemes that could help you achieve them with SIP in mutual funds. You can select funds as per their risk profile and match it with your financial goals.
For example, if your goal is to save taxes, you can look for Equity Linked Savings Scheme or ELSS. You can even consider combining this goal with your retirement planning goal. Similarly, you can use liquid funds for goals like emergency planning.
One important aspect to take care of while matching goals with funds is to match their characteristics (risk and horizon suitability).
Here are more details on matching your goals with SIP in mutual funds.
This was all about finding a fund, now, you need to go ahead and find a mutual fund scheme. There are various mutual fund schemes offered by different fund houses or Asset Management Companies (AMCs) in India.
When selecting a mutual fund scheme, it is crucial to compare different options based on several key factors:
(a) Investment Objectives
Ensure the fund’s investment objectives align with your goals (e.g., growth, income, or balanced).
(b) Fund Manager
Research the experience and performance of the fund manager. You can also look for other funds and their performance by the same fund manager.
(c) Expense Ratio
Compare the fees charged by different funds, as lower expenses can lead to higher returns. The Total Expense Ratio or TER in mutual funds plays a significant role in determining SIP in mutual fund returns.
(d) Past Performance
Analyse the fund’s historical returns, but remember that past performance does not guarantee future results.
(e) Risk Profile
Assess the fund’s risk level to ensure it matches your risk appetite.
(f) Fund Size
Consider the fund’s size, as larger funds can often have greater liquidity and diversification.
By carefully comparing these factors, you can choose a mutual fund scheme that best suits your financial goals and risk appetite.
4. Start Small and Increase Gradually
You can start with a manageable amount and gradually increase your investment as your income grows. Beginning SIP in mutual funds with a small amount and gradually increasing it offers several advantages:
(a) Accessibility
Starting with a small amount makes investing more accessible, even for those with limited financial resources.
(b) Habit Formation
Regular investing becomes a habit, promoting discipline and consistency.
(c) Averaging Down
Investing consistently allows you to buy more units when the market is down, potentially lowering your average cost.
(d) Rupee Cost Averaging
The power of compounding helps your investments grow over time, even with small contributions.
(e) Flexibility
You can adjust the SIP amount as your income or goals change.
By starting small and gradually increasing your SIP, you can effectively build wealth over time, even with modest investments.
5. Stay Consistent and Patient
The magic of compounding requires persistence and patience. Once you stick to your investment plan with SIP in mutual funds and avoid making impulsive decisions based on market fluctuations, you will see your investments gradually move closer to your financial goals. You need to remember that investments are a marathon and not a 100 metre sprint.
6. Review and Rebalance Regularly
With life, our priorities keep changing, and so do our financial goals. Therefore, it is important to monitor your portfolio’s performance and make adjustments as needed to stay on track. This can also help you in tax harvesting your returns.
Wrapping Up
With these six steps, your journey to your financial goals can become closer and easier than ever. Starting a SIP in mutual funds is a prudent financial decision for individuals seeking to achieve their financial goals. By defining your objectives, calculating investment needs, selecting suitable funds, starting small, and staying consistent, you can harness the power of compounding and build wealth over time. All you need to remember is that investing is a long-term endeavour, and patience is key to reaping the rewards.
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