Friends, SIP today is synonymous with Mutual Funds. But SIP technically, is a smart mode of investing in mutual funds. You may also choose a lumpsum investment option. Most often, we prefer SIPs since they are convenient and technically help better in compounding.
Let us understand the 5 most important things that you really need to know for your SIP Journey!
1. The first and most basic thing that you should know, WHICH SIP? You must be thinking that Which SIP means what is the amount! No! Your 2,000 SIP and my 2,000 SIP may perform differently. And that’s the secret of the mutual funds selection that we need to understand. The scheme is important. Mutual funds could be broadly of categories like
A. Liquid Funds: Short term horizon, conservative returns, majorly pooled money is parked in fixed income giving low risk instruments.
B. Balanced Funds: Mid term horizon, moderate returns, majorly pooled money is parked partially in equity & partially in fixed income giving low risk instruments. The ratio is always mentioned in fund information.
C. Growth Funds: Long term horizon, probability of high to very high returns, majorly pooled money is parked in equity. It is important that type of scheme is chosen wisely. To understand the type of fund easily, check the point 4 of this article!
2. Tax saving: When I say Tax saving in mutual fund, it is technically called ELSS scheme which means Equity Linked Saving Scheme. Having a lock in period of three years, this scheme helps you claim tax deduction under Section 80C provisions. If your tax saving is already done for this section, then a normal Growth Fund would also be a good option to go for! Here, the most important thing to remember is, 3 years of lock in doesn’t mean the fund will give exorbitant returns in 3 years. It is an “Equity Linked” scheme, hence, needs a long term horizon!
3. The N Factor: Friends, we always run after R! obviously when we are going for mutual funds, we want good returns and that’s why we have chosen Mutual funds as an investment option. But if you look at the compounding interest formula in Math, we will always get that formula which is 1+R UPON 100 TO THE power N. So, the hero of that formula is N. If you have thought of a duration while buying, please avoid excessive redemptions and avoid stopping the monthly SIP deduction. N – Number of years is the most important, that gives us the real “compounding”!
4. Risk-o-meter and the fund information: How we have the Speed-o-meter in the car same ways, SEBI has a regulation that all the mutual fund scheme data, has a risk-o-meter. Based on risk levels, you can easily identify the type of fund!! Always ensure to read fund information from the official company website before starting any SIP!
5. Redemption: You should always be mindful about your redemptions because many a times we lose on the compounding just because of redemptions. Check capital gains too since they have tax implications!
Hope this helps and Sip by Sip, you reach your prosperity benchmarks! LaxmiGyaan® is always a part of your prosperity journey !
Shared By : Priyanka Acharya,
Author’s Bio: Priyanka Acharya is a Financial Educator, and author and hosts podcast shows ‘Ek Chuki Finance’ and ‘LaxmiGyaan Library’. With her unique blend of analogy and domain expertise, she intends to be Favorite (Priy) – Episode (Anka) in every financial story!
