Things to know before you start a SIP in mutual fund

A SIP in mutual fund enables you to invest a fixed amount at regular intervals in mutual fund schemes of your choice, which in turn invest in the markets. It helps you create wealth in the long term through the 2 main benefits of SIP – power of compounding and rupee cost averaging.

But before you start a SIP in any mutual fund in India you should be aware of the following things –

  1. Investment Objective: It is imperative to know what for you are investing, short term or long term and the purpose. In short, your SIP investment objective should match with that of the scheme. Scheme investment objective can be found in the scheme information document.
  1. Fund type: As mutual funds are of various types, it is important to know which is suitable for your risk appetite.

For example – Equity Mutual Fund schemes could be the most preferred choice for doing long term SIPs provided you can take high risk. On the other hand, debt mutual fund investments may not be popular for SIP but they can give moderate return with lesser risk. In between the debt and equity mutual funds, hybrid funds can give you good returns with moderately high risk as they invest in both, equity and debt. Therefore, you should choose a mutual fund scheme for SIP suiting your risk profile.

  1. Loads and expenses – You should know the exit load of the scheme you are doing SIP in. This information is available on the application form. Before redeeming your SIP, check if any units are attracting exit load or not. Likewise, before starting a SIP, check the scheme expense ratio. A mutual fund scheme with high expense ratio can eat away a portion of the return. So, investing in a mutual fund with lower expense ratio will be wiser.
  1. Taxation – Invest in SIP Fund which is tax efficient. Example – Equity oriented funds are more tax efficient than debt funds. Likewise, hybrid mutual funds, invest in both, equity and debt. Therefore, you should know if the scheme is equity oriented or debt oriented.
  1. Tag with financial goal – SIP mutual fund investment is ideal for meeting your financial goals. Therefore, plan your goals using a SIP Calculator as it will tell you how much to invest for how many years in order to create the desired goal amount through mutual fund SIP. SIP calculator is a free online tool.
  1. Continue irrespective of market volatility – Some investors tend to close SIP mutual fund when the markets are volatile or up. By doing that they miss out on rupee cost averaging. Please note that timing the market is impossible therefore, if you should continue your SIP as you will accumulate more units when markets are low and less units when markets are high. But at the end you will always have average units cost due to the rupee cost averaging benefit.

Start a SIP in mutual funds, be happy and reach your financial goals!