Choosing the Right Investment For Your First SIP

Life is a series of many firsts. Beginning from your first step and first words to your first job, it sets the tone for future experiences and shapes how you learn and grow. Similarly, your first mutual fund investment is equally important. It sets the tone for your financial journey and influences the investment choices that you make. Inevitably, it also impacts your ability to achieve your financial goals. Thus, you must give your first mutual fund investment the attention that it requires.

There are two aspects that you need to address. The first is the choice of & mutual fund scheme  and the second is the investment route.

Choosing the right mutual fund scheme

The main aim of  financial planning  and investing is to ensure that you are able to meet your multiple financial goals and create an emergency fund that comes to your rescue in your time of need. Below is a step-by-step process for choosing the right mutual fund scheme to begin your financial journey with mutual funds.

Step 1: Clearly list out all your goals

Define all your goals in terms of what you want to achieve and how much money you would require to achieve it. For example, your goals can be to purchase a car, buy a house, save for your child’s further education, create a retirement corpus, etc. For each of these goals, you will need to determine the amount of money required to calculate the expected rate of return from your mutual fund investment.

Step 2: Identify the time-frame for achieving these goals

It is very important to determine the time frame for each of your goals. Some goals are short-term in nature, i.e., they need to be achieved within a year, some are medium-term, i.e., they need to be achieved over a period of 1 to 5 years, while others are long-term in nature, i.e., they are to be achieved after 5 years or more. Since there are mutual fund investments that are available across time-frames, i.e., overnight to greater than 5 years, the investment time period becomes very important.

Step 3: Determine your risk profile

There are several mutual funds categories that invest in a range of asset classes like debt, equity, and gold and across themes, sectors, and strategies. Thus, based on the investment, the risk of the fund would differ. At the same time, you would have a unique risk profile that would reflect your ability and willingness to take risk. You must ensure that the risk of your chosen mutual fund scheme is well-aligned with your risk profile.

Step 4: Mutual fund categories that you can consider

Your return requirements, risk profile, and investment time period will influence your choice of mutual fund investment. If your investment time frame is less than one year then you can consider investing in short-term debt funds that hold securities that mature between 1 to 12 months. If you are an investor with an investment time frame of more than 3 years, then you can consider investing in a dynamic asset allocation fund. Such a fund invests in a mix of equity and debt investments and shifts from one to another based onequity market conditions. This way, it can help you take advantage of the growth potential of equities and protect your portfolio from market falls. For a first-time investor, investment in a dynamic asset allocation fund can be particularly advantageous as it helps you benefit from the power of equities without having to take the corresponding risk. For long-term goals, you can consider a mix of dynamic asset allocation funds and pure equity funds that can potentially generate long-term wealth.

Invest via the SIP route

When it comes to  investing in mutual funds, the best way to start investing is via the Systematic Investment Plan (SIP) route. It allows you to invest a fixed amount of money into a mutual fund scheme of your choice at periodic intervals that suit you best. This means that you can start an SIP investment with as little as Rs 500 and can choose to invest fortnightly, monthly or even quarterly. The best thing is that starting an SIP is really easy. All you need to do is visit the AMC website, your distributor or online websites like Zerodha, PaytmMoney, Groww etc. choose the mutual fund scheme, the SIP amount, and frequency and you are good to go.

Benefits of investing in an SIP

For a disciplined and sustained financial plan, investment via the SIP route makes sense. There are several advantages to investing via the SIP route. Some of these include:

• Rupee cost averaging and no need to time the markets:Since you are investing a fixed amount of money at fixed time periods, you are able to buy more quantity when prices fall and less quantity when prices rise. This way, your average cost of acquisition reduces and you do not need to try and catch market tops and bottoms.
• Opportunity to compound your wealth:SIPs allow you to benefit from the power of compounding. This ensures that both your principal amount invested periodically and the returns generated are reinvested to generate further returns.

• Inculcates discipline:If you want to generate long-term wealth and achieve your financial goals then you need to create a customised financial plan and make your investments in a disciplined manner. When you  start an SIP, you make a commitment to invest a certain amount of money. This ensures that you continue to be disciplined about your investments and stay on track.

The only thing standing between you and your financial goals is the ability to make the right choices. However, in order to make the right choices you need to be informed about the various mutual fund schemes available and the best way to invest in them.

An investor education initiative by Edelweiss Mutual Fund

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