Start your SIP like a beginner, end up like a professional
The success of your SIP depends on how well you zero in on your SIP and make it into a discipline over a period of time. Here are eight guiding principles for a beginner to make success from SIP investment.
- SIP cannot be random. Start with your goal and decide how much you need to invest. You can make a broad assumption like “equity funds can give annualized returns of 14% over a longer period of time”. Just to give you an idea, a small investment of Rs5,000 per month in an equity SIP can grow to Rs1.36cr over 25 years, with your contribution at just Rs15 lakhs.
- You can have multiple SIPs but ensure that each SIP is tagged to a goal. You must be clear about the purpose of the SIP so that you can monitor the SIP along the way and don’t disrupt the SIP.
- Once you have addressed the question of “how much”, the question is of the SIP date. Set the SIP date a few days after your salary date so that your bank account is funded. To be on the safer side, set aside one month of SIP money as a reserve in your account.
- The next question is whether you should do a fixed SIP through the life of the SIP or resort to a stepped-up SIP. Stepping up is a good idea as it increases your savings with your income levels. However, you need not complicate your calculations. Keep SIPs static and look to add fresh SIPs when your income level increases.
- Next, you come to the selection of the type of equity funds for SIP. Firstly, it must be a diversified fund or a multi-cap fund. Over longer periods of time, you can take the risk of multi-cap funds for higher returns. But, you must avoid sector funds and thematic funds as they can be too cyclical and risky over time. You need something more reliable.
- Having decided on the nature of the equity funds, you still need to make a selection of specific funds. Of course, you must look at past performance. Focus on whether the fund has performed better than the index and also better than the peer group. Look at consistency of performance and give preference to the consistent performer even if the returns are a tad lower. Ideally, stick to pedigreed AMCs with an image to protect.
- There are two more choices you need to make. Should you opt for SIP with growth option or dividend option? Remember, dividend plans are best avoided as they don’t compound wealth and they are also tax-inefficient. Secondly, if you are comfortable investing as a discipline, opt for a Direct Plan. You save the sales commission and that makes a big difference to your costs and returns.
- Lastly, SIPs need to be monitored continuously and consistently. At any point of time, they need to match your SIP growth with milestones. Talk to your financial planner and make changes where warranted.
If you can follow these 8 basic guidelines; you may start off as beginner but could end up as a hard-nosed wealth creator!