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How to Choose a SIP:
Process, Funds and Choosing the Right Amount

Are you waiting for the huge windfall of money in your bank account to invest in a mutual fund? Then let us burst the bubble for you. It is a myth that you require large amounts of money to start investing in a Mutual Fund scheme. A Systematic Investment Plan (SIP) is a convenient tool to enter the world of investing with smaller, fixed amounts.

However, you need to know how to choose the SIP plan and the amount most suitable for you to invest. This plan may be very different from the minimum amount required to be invested in the mutual fund scheme.

Why is SIP the most preferred way of investing?


Easiest Method to Start Investing

Potential to grow your wealth with the power of compounding

Averages your cost of investment in any market condition with rupee cost averaging

Helps you establish a disciplined approach

Does not require high investment amount to start

How to select a SIP for investment?

Let us divide the discussion into three parts –

1. Which is a fund to start investing. 2. The SIP investment amount most suited in the product to help you achieve your financial goals. A Fund who has an experienced and qualified team of Fund Manager managing the scheme, who are continually studying the equity markets to maximise wealth creation opportunities. You may consider a Fund House, which has a decent experience with fund management and has a good amount of assets under management. It is also important that the Fund House has rigorous investment processes and audits to meet the investment objectives of the fund you are investing in.

How to choose a SIP fund?

Once you have selected the Fund House, the next step is to know what product of the Fund House you should invest in. Let us understand the broad equity categories that you can start a SIP in. There are mainly four such categories classified based on market capitalisation -

Large Cap Funds

Large Cap funds are open-ended equity funds, investing most of their assets in large-cap stocks. Large cap Stocks are 1st -100th company in terms of full market capitalization. These are mostly companies with strong fundamentals and an exceptional track record.

Mid-Cap Funds

Mid-cap funds are open-ended equity funds which invest predominantly in stocks of mid-cap companies. Mid Cap stocks are 101st -250th company in terms of full market capitalization. These companies may be the winners of tomorrow, having the potential to grow in future.

Small-Cap Funds

Small-cap funds are open-ended equity funds which invest majorly in small-cap stocks. Small-cap stocks are 251st company onwards in terms of full market capitalization. These are small companies and may be relatively new entrants in the market. Amongst all categories, they carry the highest amount of risk.

Multi-Cap Funds

Multi-cap funds generally invest in all these categories in various proportions. They invest in companies of all sizes Large-cap, Mid-cap & Small-cap.

The market capitalisation is the market price of the share multiplied by number of outstanding shares. Let's say the share market price of Company A is Rs.30, and it has 500,000 shares in the market, so, the total value of the outstanding shares of Company A is 30 x 500,000 = Rs.1.5 crore.

Based on this definition, the market regulator has classified these companies depending upon their ranking. For you, as an investor, what matters is the relative risk they bring to your portfolio.

A summary of what kind of investor can look at these investments is showcased below:

  Large Cap Mid-Cap Small-Cap Multi-Cap
Risk Profile Medium High High Medium
Recommended
Time Horizon
At least
3 years
At least
5 years
At least
5 years
At least
3 years

You can understand your risk appetite by answering a few questions. For example, how would you respond in situations when you suddenly lose your money or in times of market volatility? The answers to questions such as this one will help you understand your risk profile.

Investing with the right amount

Once you have decided the suitable product, you will have to figure out the amount you want to invest. You can start a SIP with an amount as small as Rs 100 per month. Think about it – around 5 years from now, which financial goal will you be able to fulfil with this amount? Here are a few guidelines to keep in mind before you decide the right amount:

The amount at the current cost, which will help meet your financial goal

Let us assume you are saving for your daughter's higher education. Your daughter is 9 years old now. Your education cost should, therefore, cover her course around 8-10 years from now.

Know the time frame you want to achieve your goal

Generally we will have different timeframes for every financial goal. Say the world trip you want to take can be planned next year but saving for your retirement can be done a few years later.

Average inflation rate

Inflation is that unseen evil which eats away at your investments. Make sure you count the average inflation rate and endeavour that your returns are always beating inflation. Also, the future goal amount you arrive at should include inflation.

Work backwards

To reach this inflation-adjusted goal amount, how much will you need to save per month? That is your SIP amount.

You can choose to do one SIP for each of your goals.

Let us understand this with an example

Ayush is 35 years of age and wants to retire at 55 years. His current expenses are Rs 12 lacs per annum, and he wishes to continue the same lifestyle even as his income stops after retirement. So, he has 20 years to create a retirement corpus that lasts him till he is, say 90 (assumed life expectancy). We need to calculate his retirement corpus and the amount he may need to save every month in order to achieve that goal.

Now, there may be many other factors affecting Ayush's goal achievement like the market forces at play, choice of mutual fund schemes, his own discipline at regular investment, or the ability to track them. Provided these factors, Ayush may or may not achieve the exact amount of his goal.

Let us apply average annual inflation of around, 5% over 20 years. This means the inflation-adjusted goal amount is around Rs 6.7 crores to last him till he is 90. Now that we know his goal, how much should he invest every month to achieve it? Assuming the expected rate of return from his SIP investments is 12% per annum over 20 years, Ayush needs to invest ~Rs 67,000 per month.

This SIP investment needs to be in an equity mutual fund scheme to aim to reach the goal.

Above example is for illustration purpose to understand the concept. It is based on the following assumptions and life expectancy is assumed to be 90 years. We also assume he is not having any existing investment for retirement. This illustration should not be construed as a promise, guarantee on or a forecast of any minimum returns and should not in any way construed to returns of any of Nippon India Mutual Fund Scheme

https://www.mf.nipponindiaim.com/knowledge-center/tools/retirement-calculator

Thus, if you invest in SIP after understanding your financial goal, there is a higher chance you will be investing in a SIP plan that is suitable for you. Consult your financial advisor today. You can click here to start a Systematic Investment Plan.

We at Nippon Mutual India Fund wish you the best in finding your right SIP amount. Get started now!

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