The best way to create wealth in the long run is to invest in equity mutual funds through SIPs. But in order for your SIP to work hard, you need to follow a few basic rules. A SIP is very suggestive. It is based on the premise that when you keep saving small amounts over time, they eventually grow into a large corpus. However, you have to follow some basic rules if you want it to work. Here are five such rules.
Start early; in fact as early as possible
The power of compounding is the principle that the earlier you start, the more your principal earns returns and the more your returns earn returns. That’s why the earlier you start, the greater your principal earns returns. It is the duration of the SIP that makes the biggest difference, not the amount or return rate.
Stay loyal to your SIP and stay disciplined
Once you start a SIP, discipline is paramount. Keep up with your payments and prioritize it over other expenditures. Doing so will give you maximum benefit out of the SIP. Avoid discontinuing it in the middle, as that could have an adverse effect on your wealth creation. Additionally, pick a growth plan instead of a dividend one as it ensures reinvestment of principal and returns in the fund.
Focus on diversified equity funds and focus on consistency
Investors are often perplexed when it comes to choosing a fund for the SIP. While some like to pick higher risk sector or thematic funds with the hope of greater payback, this is not an optimal option. When investing in mutual funds, diversifying is paramount as sector and thematic investments contain the risk of concentration. Therefore, when looking to build up wealth in the long-run, diversified equity funds should be favoured over sector and thematic varieties. This strategy optimizes your chances of success by spreading out any potential risks.
Let every SIP be tagged to a specific goal to make it meaningful and measurable
Before starting a SIP, ask yourself why you are doing this. Tag each SIP to a long-term goal in order to make it meaningful; for example, two SIPs can be dedicated towards your retirement, one for your child’s education and another for their wedding. Additionally, consider investing in debt funds for shorter-term objectives such as purchasing a home or car. The primary benefit of assigning each SIP to a goal is that it gives you something to strive towards and allows you to track your progress.
Monitor regularly and extrapolate in post tax terms
You need to keep an eye on your SIPs to make sure your calculations are accurate. For instance, have you overestimated the return you’re expecting? Consider if continuing with equity SIP when markets are nearing their peak is a wise move. Post-tax evaluation of SIPs will also provide valuable insights; for example, the 10% flat tax imposed on long-term capital gains in the 2018 Union Budget can drastically affect the outcome of your equity SIPs – and may mean you’ll need to increase your contributions or revise down your target. Here are some basic rules you should follow to make your SIP a true success.
