If you are new to investing, it makes sense to go slow and steady. Obviously, you have received your paycheque and maybe now wondering how and where to invest. That you have decided to invest and not spend your money is nothing short of a feat that will help you attain wealth in the long run.
If you are looking to invest in mutual funds, you may as well start by deciding between putting money through systematic investment plans (SIPs) and parking lump sum money in them. Ignorance regarding mutual funds and the benefit of investing in them have caused many investors to inquire if choosing mutual fund investments to create wealth is worth the risk. Insecurity mars them as they invest through small SIPs even in mutual funds that are in line with their investment goals.
This can be frustrating as statistics underscore how planning investments through SIPs help cut down the risk considerably while enabling higher returns. It also brings down the need to save money and then invest in a lump sum as the time lost in saving money can be used to earn returns that are then reinvested to earn more over the investment horizon. You can start by investing in monthly, quarterly, half-yearly or annual instalments throughout the investment tenure depending on how much you earn, the frequency of your income and your proposed investment tenure. Some mutual funds also allow you to invest through monthly SIPs as low as ₹500.
Once you have started investing through SIPs, all you have to do is wait for the magic of compounding to work on your regular investments and the returns earned on them. Returns are first earned on investments and then the returns earned in the previous year lend an exponential effect on your earnings, thus, allowing you to benefit from what the famous scientist Albert Einstein referred to as the “Eighth Wonder of the World”.
It helps to keep the following things in mind if you are investing through SIPs for the first time. These include:
Know your investment goals
What are your financial goals? Are you in the game for a short period only or do you wish to stay invested for the next decade or so? Before you start with your SIPs, know how long would you like to continue with them. Also, it is important to be aware of your financial goals as without knowing the target corpus corresponding to the investment period, you will not be able to decide how long you wish to stay invested.
These financial goals may vary, for example, some people invest to ensure that they have the much-desired corpus at the time of marriage three years later while some invest keeping in mind the amount they might need after retirement. Still, others invest to buy a car or a house or children’s education or their marriage within the next five years, thus, underlining how an investment can span a period ranging from five years to a decade or more.
With time, the value of money reduces considerably. That is why the first aim of investing your money should be to beat inflation. This explains you must consider stepping up your investments. Ideally, you must step up your investments by 10 per cent every year though a lot depends on how much you can afford by putting in through appraisals and bonuses too. Also, with time, you may realize that the corpus you are aiming for may not be enough to look after when you retire considering how the prices of goods are going up every year. This may prompt you to ensure a much bigger corpus, thus, necessitating you to both save and invest more.
Considering the current inflation rate is important as it will save you the heartache of not having accumulated the much-needed amount or not having enough money when you need it the most. Harbouring a complacent attitude toward money may cause you to feel satisfied with low returns, thus, destroying the whole idea of investing your earnings. Once you factor in the inflation rate while setting your financial goals, deciding on the ideal SIP amount corresponding to the investment tenure becomes easy.
Know your investments
Do you have a higher risk appetite than others or do you want to play safely while investing your money? You must be able to answer questions like these before deciding between equity, debt and hybrid funds. For example, the not-so-courageous put their money in fixed-income plans and gilt funds comprising government securities, corporate bonds, and so on.
Those willing to dabble in the market and looking to earn returns in sync with it can opt for equity funds. The return expectations are high in this case, especially among those, putting their money in sectoral or thematic fund schemes. Other equity funds that invest money irrespective of sector or market capitalization are comparatively less volatile than sector funds. Expenses matter as much as your earnings and savings. That’s why you must study the expense ratios of various funds and check if a particular fund house is charging too high or more than the category average.
Prolong your equity investments as putting money through regular SIPs allow scope for rupee cost averaging in the long term. This means that the longer you invest through SIPs, the better your chances of earning higher returns.
Also, debt funds come with a limited investment horizon, and so serve best looking for good returns within a short period. These returns exceed earnings from government and corporate fixed deposits and are best suited to those with a low-risk appetite. Corporate deposits yield more returns than government bonds in most cases, though you must be mindful of the credit ratings of the companies you invest in.
Hybrid mutual fund investors putting their money in balanced advantage funds enjoy the best of both worlds as a part of their money continues to earn from equities while the remaining stay invested in debt instruments.
Pumping money into multi-cap and Flexi-cap funds is another great way to continue shuffling your investments in tune with the market. The risk appetite is moderate among investors though.
An alternate investment option for completely risk-averse investors is to invest regularly in various index funds. There are large-cap index funds, mid-cap index funds and small-cap index funds depending on which indices you want to track. Index funds are completely free of fund manager biases since they mirror the market movements. That is why they are also known as passive investments.
Fund managers differ
It is the same stock market catering to all investors. Despite the money getting invested in similar stocks and shares, returns from funds differ. The answer lies in the fund managers’ ability to manoeuvre their way through the market as they skilfully trade in shares and stocks. That is why choosing the right mutual fund company is also important as different companies offer different schemes.
Not all mutual fund companies have performed as per investors’ expectations. One may compare the various fund returns by various asset management companies to decide which they must choose to invest in. Though past returns should not be the yardstick to gauge future returns, a lot helps if you check on the companies’ track records, their expense ratios, past performance and their response to the market, especially, during severe and prolonged downturns. Do check the exit load of the various funds too before investing.
Diversification is the key
While you plan your investments in advance, make sure to diversify them too. Going deep dive into equities may cause you to suffer from losses many times. Similarly, going headlong into debt funds will limit your ability to earn returns. Opt for a healthy mix containing both equities and debt. There may be myriad factors affecting your risk appetite. Diversifying your investments and holding them in a healthy proportion will lower the risk factor associated with investments.
Similar diversification among fund companies is also important as different strategies adopted by them expose investors to novel strategies and diverse earnings in different years throughout the investment horizon. However, make sure not to over-diversify your investments as it may cause you to suffer unnecessary losses or not yield the kind of returns that you have been aiming for.
Apart from putting money in equities, debt and fixed-income plans like provident fund accounts (including Employees' Provident Fund and Public Provident Fund), pension plans and bank deposits, investors may consider small and equal investments in gold too. Gold is an effective hedge against inflation, thus, helping to make up for the losses. You can buy sovereign gold bonds (SGBs) or put some money regularly in either gold mutual funds or gold exchange-traded funds (ETFs). However, while investing in gold ETFs, check for liquidity and the daily volume of transactions.
If you are wary of ETFs, invest in Fund of Funds tracking and investing in ETFs and various mutual funds depending on their composition.
Investing in small chunks through regular SIPs in the commodities market can help though one must be aware that these markets are cyclical, which means that returns will not be consistent. These markets take time to perform, which means that you will earn profits in sizeable amounts sporadically and not the regular returns that you find in most other investment opportunities.
Holding some amount of cash is also important as opposed to committing your entire earnings to investments. This is important to tackle unforeseen emergencies like sudden hospitalization or meet expenses due to loss of job.
Track your investments’ progress
It is not enough to invest and stay invested. Keep checking the progress of your investments. Check if the SIPs invested regularly are getting credited to your investment portfolio. In the short run, your investments may earn negative returns or may not yield as planned; however, on tracking these investments after a year to a decade or more, you will realize how your investments are performing. Tally the earnings with those earned from similar funds or other investment options. This will help you gauge the effectiveness of the investments that you have chosen.
If your investments are not performing well in a one-year timeframe, check out for possible factors affecting their returns. Verify if there are macroeconomic factors at play responsible for diminishing or low returns. Then decide whether you must stick to your investments or part with them for better options. Take necessary measures to track your investments and list them in the decreasing order of returns. Also, list separately the investments that you had bought as a hedging measure. Then, list the fixed income plans like bonds and deposits that you may have put your money into depending on your financial goals and your risk appetite.
Whatever your investments are, you must take care to be consistent with them. Persistence is the key to continuing your investments over a prolonged period and then earning from them accordingly. Diversification helps, but only when you decide to continue parking your money in your choice of investments. Be aware of your financial goals so that you can make better decisions regarding the choice of funds and when to switch them.