New to SIP? 6 Key Things You Can Do to Earn Higher Returns

If you want to invest in mutual funds, you can also start by deciding between investing through systematic investment plans (SIPs) and investing in them as a lump sum. Ignorance about mutual funds and the benefits of investing in them has led many investors to ask whether choosing mutual fund investments to build wealth is worth the risk. Insecurity haunts them as they also invest in mutual funds through small SIPs which are in line with their investment goals.

This can be disappointing as the data underscores that planning investments through SIPs helps in reducing the risk significantly while enabling higher returns. It also obviates the need to save money and then invest in lump sum as the time lost in saving money can be used to earn returns which is then reinvested to earn more over the investment horizon. You can start by investing in monthly, quarterly, half-yearly or yearly installments depending on how much you earn, the frequency of your income and your proposed investment tenure. Some mutual funds allow you to invest through monthly SIP for as little as 500.

Once you start investing through SIPs, all you have to do is wait for the compounding to work its magic on your regular investments and the returns earned on them. The returns earned on investments first and then the returns earned in the previous year have an exponential effect on your earnings, thus, you benefit from what the famous scientist Albert Einstein referred to as the “Eighth Wonder of the World”.

If you are investing through SIP for the first time then it helps to keep the following points in mind. This includes:

Know your investment goals

What are your financial goals? Are you in the game only for a short period or do you want to stay invested for the next decade? Before starting SIP, know for how long you would like to continue it. Also, it is important to be aware of your financial goals because without knowing the target fund as per the investment tenure, you will not be able to decide how long you want to stay invested.

These financial goals can be different, for example, some people invest to ensure that they have the much desired corpus at the time of marriage after three years, while some keep the required amount after retirement. make investments. Still, others invest to buy a car or home or children’s education or marriage within the next five years, thus outlining how an investment can last from five years to a decade or more. It is possible

beat inflation

Over time, the value of money decreases significantly. So the first objective of investing your money should be to beat inflation. This suggests that you should consider increasing your investment. Ideally, you should increase your investments by 10 percent every year, although a lot depends on how much you can spend through valuations and bonuses. Plus, over time, you may realize that the corpus you’re aiming for may not be enough to take care of you when you retire, given how commodity prices are rising every year. . This can lead you to ensure a huge corpus, thus, you will need to both save and invest more.

Keeping the current inflation rate in mind is important as it will save you the heartache of not accumulating the much-needed amount or not having enough money when you need it the most. Adopting a complacent attitude towards money can leave you feeling satisfied with diminishing returns, thus, destroying the whole idea of ​​investing your earnings. Once you keep the rate of inflation in mind while setting your financial goals, it becomes easy to decide on the ideal SIP amount to suit the investment tenure.

Know your investment

Do you have a higher risk appetite than others or do you want to play safe while investing your money? You should be able to answer such questions before deciding between equity, debt and hybrid funds. For example, those who are not adventurous tend to invest their money in fixed-income plans and gilt funds, which include government securities, corporate bonds, etc.

Those who want to try their hand in the market and earn returns with it can opt for equity funds. Expectations of returns in this case are high, especially among those who invest their money in regional or thematic fund schemes. Other equity funds that invest money regardless of sector or market capitalization are comparatively less volatile than sector funds. Spending matters as much as your earnings and savings. Therefore, you should study the expense ratios of various funds and check whether a particular fund house is charging much or more than the category average.

Lengthen your equity investments as investing through regular SIPs gives scope for rupee cost averaging over the long term. This means that the longer you invest through SIP, the better will be your chances of earning higher returns.

Also, debt funds come with a limited investment horizon, and hence work best when one is looking for good returns within a short period. These returns are higher than the earnings from government and corporate fixed deposits and are best suited for low-risk individuals. Corporate deposits offer higher returns than government bonds in most cases, though you should be mindful of the credit ratings of the companies you invest in.

Hybrid mutual fund investors who invest their money in Balanced Advantage Funds enjoy the best of both worlds as a fund continues to earn a portion of their money from equities while the rest is invested in debt instruments.

Investing in multi-cap and flexi-cap funds is another great way to continue adjusting your investments to suit the market. However, the risk appetite among investors is moderate.

An alternative investment option for investors who are completely risk averse is to invest regularly in various index funds. There are large-cap index funds, mid-cap index funds and small-cap index funds, depending on which index you want to track. Index funds are completely free from fund manager biases as they reflect market movements. This is why they are also known as passive investments.

fund manager different

This is the same stock market catering for all investors. Despite being invested in similar stocks and shares, the returns from the fund vary. The answer lies in the ability of fund managers to maneuver their way through the market as they trade stocks and shares efficiently. Hence choosing the right mutual fund company is also important as different companies offer different schemes.

Not all mutual fund companies have performed as per the expectations of the investors. One can compare various fund returns by different asset management companies to decide which one they should invest in. Though past returns should not be the yardstick to measure future returns, it helps a lot if you examine the track record of companies, their expenses. Ratios, past performance and their reaction to the market, especially during severe and prolonged downturns. Also check the exit load of different funds before investing.

Diversification is the key

When you plan your investments in advance, be sure to diversify them as well. Taking a deep dive into equities can cost you losses at times. Similarly, talking head-on in debt funds will limit your ability to earn returns. Opt for a healthy mix of both equity and debt. There can be a myriad of factors that affect your risk taking ability. Diversifying your investments and keeping them in a healthy ratio will reduce the risk factors associated with investing.

Similar diversification among fund companies is also important as the different strategies adopted by them expose investors to new strategies and diversified income across investment horizons in different years. However, make sure not to over-diversify your investments as this may lead to unnecessary losses or not yield the kind of returns that you are aiming for.

Apart from putting money in equity, debt and fixed income schemes such as provident fund accounts (including Employees Provident Fund and Public Provident Fund), pension schemes and bank deposits, investors can also consider small and equitable investments in gold. Gold is an effective hedge against inflation, thus, helping to offset losses. You can buy sovereign gold bonds (SGBs) or invest some money in regular gold mutual funds or gold exchange-traded funds (ETFs). However, while investing in gold ETFs, check the liquidity and daily volume of transactions.

If you are wary of ETFs, invest in Fund of Funds and track and invest in ETFs and various mutual funds based on their composition.

Investing in small portions through regular SIPs in the commodity market can help, however be aware that these markets are cyclical, meaning the returns will not be consistent. These markets take time to perform, which means you will generate large amounts of profits sporadically and not the regular returns you find in most other investment opportunities.

It is also important to keep some amount of cash as opposed to putting all your earnings in investments. This is important for dealing with unforeseen emergencies like meeting expenses due to sudden hospitalization or job loss.

Track the progress of your investments

Investing and staying invested is not enough. Keep checking the progress of your investments. Check whether regularly invested SIPs are getting accumulated in your investment portfolio. In the short term, your investments may earn negative returns or may not yield as planned; However, by tracking these investments after a year to a decade or more, you will know how your investments are performing. Match earnings earned from similar funds or other investment options. This will help you assess the effectiveness of the investment you choose.

If your investments are not performing well in the one-year time frame, check the possible factors affecting their returns. Verify whether there are macroeconomic factors that are responsible for diminishing or diminishing returns. Then decide whether you should stick to your investment or part ways with them for better options. Take the necessary measures to track your investments and list them in descending order of return. Also, separately list the investments that you purchased as a hedging measure. Then, list the fixed income schemes such as bonds and deposits that you may have invested your money in based on your financial goals and your risk appetite.

Whatever be your investments, you must take care to stay consistent with them. Persistence is the key to sustain your investment for a long time and earn from it accordingly. Diversification helps, but only if you decide to continue investing your money in investments of your choice. Be aware of your financial goals so that you can make better decisions regarding the choice of funds and when to switch them.

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