How can a SIP help you Create Wealth?

 

I am guessing everybody these days would know what a SIP is. It’s a Systematic Investment Plan. It is an investment route offered by Mutual Funds wherein one can invest a fixed amount in a Mutual Fund scheme at regular intervals– say once a month or once a quarter, instead of making a lump-sum investment. You can start creating wealth with as small an amount as Rs. 100 (depending upon the scheme and AMC). It’s a convenient method of investment as it allows for you to give your bank a standing instruction to debit the amount on a particular date of the month or quarter. The facility of Daily SIPs is also available in certain funds.

Everybody is aware of the advantages that SIPs offer. The advantages would include not worrying about market volatility (as against Direct Equity investments). It would mean consistent investing that too for the long term.

Now, I would like to focus on what can investors do more in order to Generate Wealth through Equity Mutual Funds.

•         My personal approach is to start diversifying your SIPs based on Market Capitalizations. The starting point would be a Nifty 50 Index plan which is a passive mutual fund. This would replicate returns on Nifty 50 which would give you moderate return with a very low risk. The next step would be to go for a Large Cap Active Fund which might give you better returns than Nifty 50 index plan if the right companies are chosen. The step after that would be to go for a Midcap/Small Cap fund which will not always give you the best returns but will definitely help you grow your long term wealth.
•       A Multicap Fund can also be chosen which will cover all Market Capitalizations in one fund.
•       My personal belief is that a Gold Fund should also be included. In India, gold is considered to be the most auspicious and reliable investment. Investing in Gold directly is not always possible as it required huge capital investment. A small SIP in a Gold Fund would help you make the most of the rising gold prices in the economy.
•       A sector fund would be a very risky investment as you would be putting all your eggs in one basket. If you feel that a particular sector is likely to grow in the future, then it would be a good idea to start an SIP in a sector fund. (This is very difficult to predict though). Same is the case with Thematic Funds.

I explained what type of funds you should start an SIP in. Now I will explain how you should go about this SIP journey.

•             Start as Early as possible. The earlier, the better.
•        Goal Based SIPs are also an option. For short term goals (6 months to 3 years), you can invest in debt funds. For long-term goals, an SIP in Equity Funds (3 years and above) would be better. You can also go for Hybrid funds which are a mix of Equity and Debt.
•       For Tax saving, go for an ELSS fund.
•       Diversifying is important so including an International Fund will also help.
•       As and when time passes by, you should always increase your amount of SIPs. A 5-10% increase in your SIP amount will help you create a bigger corpus for better returns.
•       Reviewing and Rebalancing are very important. Getting out of the under performers & re-investing them in a better fund is more important than waiting for them to perform and then get out of it.
•       Risk reduction near to your goal is very important so that you do not lose out on your returns.

All these are general guidelines. But its always better to take help of an Investment Adviser who has better knowledge on the investments part. (This is where somebody like me comes in :P). An Investment adviser will help you select a fund which is best suited for your return/risk profile along with current market conditions. They will also be able to help you advice on when to switch between funds to get better returns. It is very necessary to keep track of market dynamics. For e.g. if a fall is expected in the equity markets, then the investment advisor will advise you to increase your SIP amount (if it’s possible by the client).

Hope this helps the fellow investors!!!!!