Let us see how we can use MF SIPs to work in the best way for us.
Link SIPs to investment goals – We all have long-term financial goals – child's education or comfortable retirement. Once the goal and the amount required are identified, one can invest in the appropriate MF schemes using the SIP method. The investment amount will become large over a period of time. Returns will be earned not only on investment but also earlier returns. This will help in reaching the financial goals. Once you have linked the SIP with the goal, you will become disciplined too and make sure that you contribute regularly and review the performance of the scheme.
Make SIP investments a habit – SIP is a great way to create wealth. MF SIP investments have a low entry barrier. Most MFs accept a minimum of Rs. 500 or Rs. 1000 for SIP instalments. It is not difficult to save up that amount and invest it regularly (e.g. monthly) in selected MF schemes.
Build a corpus – It is important to keep aside some liquid money to cover for emergencies like an accident or job loss. This is called an emergency fund or contingency fund. Usually the amount should be enough to cover your expenses for about 3-6 months. This includes the living expenses of you and your financial dependents, EMIs etc. Now since this sum cannot be built overnight, you can start saving and investing little by little in a MF scheme. This will help you build the amount required as contingency fund.
Do not miss the bus – MF SIPs are good to build wealth. But you have to be patient. Sometimes people lose heart when there is volatility in the market. They sell off their SIP investments. This is done too soon or when the markets are down leading to less than optimum returns or even losses. When the market is down, buying the right MF schemes is a good move as you will get units at lower NAVs. This leads to reduction on overall investment cost.
- MF SIPs are not a guaranteed way to make money. The returns depend on market performance and fund performance.
- SIPs can average out the costs but there is no guaranteed capital protection nor guaranteed returns.
- The returns from SIP investments will be different in different time periods.
- You should know when to end the SIP. You should have a target in mind and stick to it.
SIPs are useful for investment. But one should not blindly go ahead and start SIPs in random MF schemes. MF SIPs take advantage of regular investments and the magic of compounding. They work well when the market is in the median range of its value and is tending downwards but is expected to bounce back. They are good investment vehicles provided you have selected the right schemes and invest at the right time.