More and more investors are becoming aware of the benefits of investing through mutual fund SIP. While deciding to do a SIP itself is a great start toward financial freedom, you may still fall short of your financial goals if you do not invest in mutual funds the right way!
The most important step in the journey to your financial freedom is to clearly define your goals. We usually have multiple goals in life e.g. buying a house, children’s education, children’s marriage, retirement, etc.
It is not enough to say you need so many Lakhs or Crores by the age of 50-60; all goals in life are important. You need to clearly define, how much you need for each goal. You should also factor in inflation while defining your goals; otherwise, you will be woefully short of your goals. To calculate your goals while factoring in inflation, you must take the help of a SIP calculator. A SIP return calculator can tell you what should be your goal amount basis the SIP investment tenure and the expected returns.
The next step is to determine your risk capacity. Risk capacity depends on multiple factors. If you have a long investment tenure, you can take higher risks and invest in equity mutual funds. Please note that risk-taking capacity reduces with age. While risk capacity should be the most important factor, your attitude towards it will also invariably influence your SIP mutual fund investment decisions.
The third step before starting a mutual fund SIP is asset allocation. Asset allocation is the mix of different asset classes like equity, debt and gold, etc. in your overall asset portfolio. Optimal asset allocation determines whether you are taking the right amount of risk. Since SIP investment is usually long-term, you should be mindful of how your investment will impact your total asset allocation and plan accordingly.
For example, when you are young, your optimal asset allocation can be overweight on equities, thus you can shave SIP in equity mutual funds. But, if you are say, 50 years old, your asset allocation may be balanced between equity and debt. In that case, even in long term, it may be prudent to have SIP in hybrid mutual funds.
The final step of SIP investment is fund selection. There are thousands of mutual fund schemes and selecting the right fund for SIP can be a daunting task. However, if you follow the steps discussed above, your task will become simpler.
As discussed, your mutual fund investment depends on financial goals and asset allocation. If the goal timeline is long and risk high, you can narrow down fund selection to equity mutual funds; you can further narrow down the selection to large or midcap mutual fund schemes or a mix of both depending upon the exact risk you can take. If your risk capacity is moderate, then SIP in hybrid mutual fund schemes can be considered.
If you follow a methodical approach, by selecting the right funds for your mutual fund SIP, you will be well placed for investment success.