Generally, mutual fund investment can be categorised into two types. One is a lump-sum investment, which is a one-time payment. The other type is a systematic investment plan (SIP). In SIP investments, you can pay for your mutual fund scheme through monthly deductions. By leaving a standing instruction with your bank, you don’t even need to pay yourself, the amount will be deducted from your account automatically.
While you can invest a small amount in SIPs, some investors invest a large amount at regular intervals in mutual funds SIP. For example, you earn ₹90,000 per month. So, for investments, you decide to opt for SIP in which you allocate ₹50,000 every month. So, before going ahead with the investments, you need to keep certain things in your mind. Listed below are the things you need to remember:
- Ensure that your earnings remain consistent:
SIPs are a very convenient way of investing for middle-class people. Unlike lump-sum investments, where you are required to invest in one go, with SIPs, you can continue investing for decades and decades, and that too at a very low amount. So, with SIPs, you are investing a huge amount, just make sure that you have access to the same amount so that you can keep investing consistently.
- It is important to time the market:
Once you have opted to invest in your mutual fund SIP for a large sum, you need to also worry about the timing of your entry into the market. For example, the market is going through a bear phase. In case your funds are invested in the market during this volatile phase, then it is very probable that you may find the value of the portfolio down by 10%. It can be quite perplexing, particularly when there is a large amount involved and you see the value of your portfolio value down in just a few days. What you can do is use the market price-earnings (P/E) ratio and market dividend yield ratios. Do this to get a hang of the market valuations. Generally, it is a much better option to invest a large sum of money in equity funds when the P/E of the NIFTY is 12-14 than to invest when the P/E of the NIFTY is 22-24. Remember, when the P/E levels are low, the chances for safety are much higher. Other than the P/E ratio, it is important to remember that you are better off allocating funds when the dividend yield of the index is above 1.75% instead of investing when the dividend yield stands below 1%. You need to worry about market-level valuations when a huge sum of money is involved.
- Park money in a money market fund:
It will also be prudent to deposit the funds in a money market fund. It is a wise move to do so because you can earn more than 6% annually. Money market funds are a better use of idle money. Apart from money market funds, you can also opt to invest in debt funds. But you can do so if you are convinced that bond yields and inflation are down rather than being up. That’s because the bond prices are adversely related to bond yields. Moreover, debt funds underperform whenever rates and bond yields are on the rise.
- Use STPs:
A systematic transfer plan (STP) is known for investing your fund in a money market fund. Every month, a certain sum is transferred into an equity fund. With the help of this process, your funds earn a higher rate of return. If you are aware that catching market bottoms is both unproductive and impossible, don’t waste your time or lose sleep over it.
- Also, it would be better if you were investing for the long haul:
Before you begin with investments you need to determine one very basic thing. It is to ascertain the duration for which you can remain invested in the market. Also, you need to be prepared for the market fluctuations. Some days, the market might be soaring and suddenly it all may come to a stand-still. So, to give your investments some time to grow, you must be investing with a long-term goal in your mind.
In short, while you are still free to invest a large sum of money on your SIP, it will be better if you were to keep it low (at least at the start of your career).