Mutual fund SIPs: Five important questions answered

Mutual fund has emerged as a popular investing option for meeting long-term goals. The popularity of mutual funds is increasing day-by-day because of simplicity, transparency and being a cost-effective tool to generate high returns compared to other investment options. One may invest a lump sum amount as and when the money is available or become a disciplined investor by using the SIP mode of investing.

Here are five questions which investors face: 

1. What should be the SIP amount?

Before you begin saving through SIPs, make sure you have properly estimated the amount that you wish to save. Based on the current cost of the goals, number of years to goal to arrive at the inflated amount. Now, you need to find out how much you need to save each month towards the inflated amount of the goal. This exercise will help you to save the right amount towards your long term goals.

2. How much funds are enough?

Instead of buying several MF schemes, its better to hold a few of them. Make sure there is no duplication across sectors and market capitalization. A handful of MF schemes with proper diversification will go a long way in creating wealth over the long term. Over time, you may add additional lump sum amount into the same folio of the MF scheme rather than buying a new one.

3. In which fund should I start SIP?

Based on your age and risk appetite, buy schemes across the spectrum – from large-cap to mid and small cap funds – a diversified portfolio should be the approach. But, do not go only by the recent performance in the schemes. Choose schemes that have shown consistent performance over the long term and have beaten their benchmark across most tenures.

4. How can I build portfolio?

For better management and to keep the focus on your goals, you may have a goal-based portfolio. So, for goals such as children education you may have a separate portfolio and SIP funds may be earmarked towards it. Similarly, for retirement, you may have a separate portfolio. Remember, SIPs work best in equities as an asset class and hence SIP in equity mutual funds is a better approach to save for the long-term.

5. Which date of the month should I start my SIP? 

Generally, the SIP dates are 1st or 7th of the month and any date should be fine as per your convenience. The choice of the bank account is also important. Usually, most of us have more than one bank account hence just make sure you will have the adequate balance when the SIP hits your bank account.

Finally, starting SIP is only half the job done as far as meeting your long term goals are concerned. There will be volatility in the years ahead as equities are by nature a volatile asset. Do not make an attempt to redeem due to short term movements in market and stick to your original plan. With around three years way from your goals, you may start shifting funds from equity to less volatile debt assets. Years later, with your goals accomplished through SIP, you will surely cherish the day when you started your journey of investing through SIPs.

(The writer is EVP & Chief Marketing Officer, Bajaj Capital. Views expressed are personal)