Taking the SIP route to investment?

Often recommended as the most ideal investment medium, a Systematic Investment Plan (SIP) can help you significantly in sustainable wealth creation, provided you pay heed to some important points as follows:

Don’t try to be too adventurous when selecting the mutual fund for your SIP. Avoid the untested and new ones. Instead go with the fund house, which has been around for some time and enjoys good credibility in the financial circles.

Although diversification has its own benefits, diversifying too much can result in problems.

So, if you plan to invest around Rs 15,000 per month via SIP is, split that amount into parts and allocate the parts to around four to five SIPs.

Research has revealed that mutual funds that have lower expense ratios deliver high returns over a period of time. Hence, when stuck between two schemes having similar attributes, opt for the one that has a lower expense ratio.

Consistent returns
Go with the schemes that have been delivering consistent returns over time periods like 3, 5, 7 and 10 years instead of the ones that have the highest six-month returns.

When it comes to selecting the right mutual fund for SIP, you should select the one that has proved its ability during both the market’s ups as well as downs. Though past performance may not always be the key to decide on future investments, consistency in performance cannot be ignored as a significant indicator of the fund’s reliability.

   Avoid giving into the herd mentality. Many a times people choose to invest blindly into the heavily advertised and so-called best performing schemes.

Doing your own due diligence and finding out if a particular scheme has performed well over longer time periods is not easy always.

Don’t invest in SIPs having similar kinds of schemes. Normally, investors can be seen putting their money into different schemes of one or more mutual funds.

Find stocks
In the end, they’re left with nothing but similar types of funds. This automatically implies that they get exposed to same kinds of stocks. For example, it is very easy to find stocks such as HDFC, ITC etc. in different mutual fund schemes.

Being an investor, you must ensure that you’re not overly exposed to the same kinds of stocks, as it may significantly enhance your risk level, especially if the stocks concerned haven’t been the best performers.

The SIP payment dates are crucial and they must be in line with the times when you have enough funds available in your bank account. Ideally, keep your SIP payment date few days after you receive your salary.

It is best to invest through a SIP for longer periods, around three to five years to get the maximum advantage from the fund’s performance. People often overlook the operational side of SIPs while making their selection. Please note, this may have a major impact on the returns you receive and the taxation aspect.

Every SIP payment made each month/quarter becomes an independent investment when it comes to its tenure, exit load and the taxation aspect.

Hence, you must look ahead and make sure that it completes its exit load period. Furthermore, any such investment may attract short-term capital gains tax if it doesn’t complete one years’ time from the date of payment.

 As an investor you should be watchful about where your money is going, especially when you’re giving others the responsibility of handling it.

Eventually investing via SIPs is a lot about selecting the right type of mutual fund scheme/s, which in turn must align with your asset allocation strategy. So, follow the above-mentioned points and invest wisely.

(The writer is Head at Aditya Birla Money MyUniverse)