5 things to consider before investing in

SIP

Systematic Investment Plan• Systematic Investment Plan (SIP) is a smart and

convenient mode of investing money into mutual funds• SIP is a planned approach which allows you to invest a

certain pre-determined amount at a regular interval (weekly, monthly, quarterly, etc.)

• It not only helps in inculcating the habit of saving but also building wealth for the future.

• Remember: SIP is a plan/mode of investing and NOT a product by itself!!

Why SIPs

?

Power of Compoundi

ng

Encourages

Disciplined

Savings

Helps achieve

long term goals

No need to time

the market

Ensures Flexibilit

y

5 things to consider before

investing in SIPs

Identify your dreams & goals

Identify your Investment Horizon

Set apart your Investment Amount

Understand your Risk Appetite

Select the Fund House carefully

#1 Identify your dreams & goals

• Before you start investing, it is crucial to ask yourself 2 important questions “Where am I? And where do I want to reach?”

• Understanding your current financial position and listing out the instruments you are currently investing in, is important when you start planning your finances.

• It is also necessary to check the proportion in which your current investments are laid out (equity, fixed-income products, gold, etc.)

• After understanding your current financial standing, note down your key financial goals and the target value of each goal

• Your goal could be buying a new house, a new car, your child’s higher education or marriage, planning for retirement, etc.

• This will help you realize whether your goal is wealth generation or safety of your funds or having a well stocked emergency fund, etc. And this will help you further understand which investment options would suit you best.

#2 Identify your Investment Horizon• “By when do I want to get there?” should be the next

question you need to ask yourself. • Assigning a timeline to each of your goal will help you in

choosing the most suitable type of mutual fund• Equity funds are best for long-term goals (10-plus years),

hybrid funds for medium-term goals (4-8 years) and conservative fixed-income funds for goals that fall within the next 2-3 years.

• For example, if your goals are short term in nature (ranging from one month to three years) like buying a car or house, going on a foreign vacation, house repairs and so on it is better to invest in relatively safer funds such as Debt funds, Gilt funds, etc.

• If your time horizon is more than 7-10 years, then SIPs in equity mutual funds will enable you to create a good corpus and the compounding factor will come in play in your portfolio.

#3 Set apart your Investment Amount• While deciding the amount of SIP you are willing to invest

regularly, it is essential to keep in mind the target value of each of your goals and increase it by a reasonable inflation rate to arrive at the amount that will be required to successfully fulfill your goal.

• For example, if you are saving to buy three years later a car that costs about Rs.5 lakh today, assuming 5% inflation in car prices, you should target having around Rs.5.79 lakh at the end of three years.

#4 Understand your Risk Appetite • Analyzing your risk appetite will enable you to understand the amount

of risk and type of risk you can tolerate to meet your investment objectives. It will thereby enable you to select the best product given your risk tolerance

• Assessing your risk appetite depends on multiple factors such as your age, your occupation, your current savings, time left to reach your goal set and so on.

• While it may be attractive to allocate your investment in the asset class known to offer highest returns, which is equities, it is very important that they are aligned to your risk appetite

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Risk hierarchy of Mutual Funds

Money Market Funds

Gilt Funds Debt Funds Hybrid Funds

Equity Funds

Aggressive Growth Funds

Balanced Funds

DiversifiedDebt Funds

Gilt FundsMoney Market

Funds

Flexible AssetAllocation

Growth andIncome Funds

High YieldDebt

Focused Debt

DiversifiedEquityRisk

Level

Type of Fund

Equity Income

#5 Select the Fund House carefully• It is the decisions taken by your fund house that will take

you closer to your goals and secure your future wealth creation. So it is extremely critical that you choose a dependable investment partner.

• The important parameters to look at while selecting a fund house are:• Size of mutual fund corpus• Historical performance of the firm• Track record of your fund manager

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Other Investment Considerations

Expense RatioTrack this ratio,

invest in the firm charging lower ratio

Post-tax ReturnsHow much is really left for post tax ?

LiquidityYou get your money back

When you want it

Convenience Easy to invest, disinvestand adjust to your needs

Albert Einstein once said, "Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn't... pays it."

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