SIP investment: 5 things you should consider before investing in mutual funds

Before you begin investing in mutual funds through SIP, you should have a goal in mind.

Monitor the performance of the fund in which you have put your money regularly. Image: Pixabay

SIP, or Systematic Investment Plan, is a way of investment that allows you to invest a certain amount in a mutual fund scheme at regular intervals—daily, weekly, monthly, or quarterly.

How does it work?

A defined quantity of money is withdrawn from an investor's bank account regularly (monthly, quarterly, etc.) and invested in a mutual fund of your choice through a SIP. The amount of units you purchase is determined by the mutual fund's Net Asset Value (NAV) at the time of purchase. When NAVs are low, more units are issued, and when NAVs are high, fewer units are issued. This method, known as rupee cost averaging, can assist in reducing the impact of market volatility.

Here are a few things that investors should consider while investing in mutual funds.

Know your goal

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Before you begin investing in mutual funds through SIP, you should have a goal in mind. Whether it is for paying your studies or to purchase a property; or to save money for your retirement or to buy a big car. Identify these objectives, and you will have a better idea of the investment strategy that will best meet your needs.

Know the investment amount you require

Your objectives will help you determine how much money you will require. You may assign a monetary value to the objective by using the current cost of that commodity. The next step is to calculate its future cost based on the price of that commodity in the year you want to purchase it. These two figures will give you the amount of the installment you must pay.

Determine the best investments

Determine the best asset class to assist you in achieving your objective within the time limit you've selected. If you desire big returns in a short period, you should use schemes with a high-risk element, such as liquid funds, because risk is directly proportionate to rewards.

Do research to choose the right scheme

Choose the best scheme to help you achieve your objectives. You may do this by completing your own study or by visiting an asset management firm or fund house. They will be able to assess which mutual fund plan is the best fit for you based on your goals and time period.

Monitor the performance of the fund

Monitor the performance of the fund in which you have put your money regularly. If you are investing for the short term, you must maintain a careful eye on your scheme; however, if you are investing for the long term, you must check your plan at regular intervals to stay up to speed on its performance.

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