What Is The Right Time To Start A SIP?
Systematic investment plans are a helpful scheme for people who can’t afford to invest a lump sum amount of money in starting investing. Hence, it is a favorite tool of many people to build a retirement corpus. But one confusion many investors have regarding SIP investments is the timing of the investment. Is there a right time to start investing? Should time horizon be a factor when considering SIP investments? Let us find out.
Investment timing – lumpsum vs SIPs?
There are two ways in which you can invest in mutual funds. You can either invest a lump sum amount of money or invest through monthly installments. Timing affects both these methods differently.
Investing a lump sum amount of money in a mutual fund is similar to buying a share (or stock) of the company in the hope that you can benefit from the price growth. Here, if you invest at a time when the price is at a high, it may be harder for the fund to raise much beyond that. This could limit the return potential you have. Hence, when you invest a lump sum amount of money, timing plays an important part.
But what about when you invest through SIPs?
Investments through SIP are meant for creating a large corpus over a longer period. Markets are predicted to grow over a longer period, and hence, your investments too. Thus, timing has the least effective when it comes to SIP investments. Furthermore, SIP investments are often made on a fixed day every month. Hence, it would be incredibly difficult to time your investments every month. Waiting for the right time every month could make you miss the payments even.
Hence, in short, your SIP investment performance won’t be affected by the timing of the investment in most cases.
But if the timing is not a deciding factor, what all are? Let us explore.
Factors to consider when investing through SIP
Understand your goals – Creating a corpus through SIP can be compared to building a house. If you don’t have a plan or a goal, how will you know how much raw materials you would need? More importantly, what will you be building? Investing through SIP is similar. If you don’t have a fixed goal, it will be hard to design a plan.
On the other hand, if you have a plan, you will get a clear idea of where you should invest, how much you should invest, and how long you should invest.
For instance, let us suppose you are trying to build a retirement corpus. Here, you would have a goal amount and an idea about the number of years you have left. Hence, you could just use a SIP calculator to find the SIP amount and plan accordingly.
Understand your risk appetite – Understanding your risk appetite is equally important. You should have a clear idea about how much you can risk and invest accordingly. This helps you in choosing a fund as well. For instance, if you are risk-averse, you may choose a fund with lesser equity elements.
Research about the fund – It is a wise idea to understand the fund before you put your money in it. Research here could include past performance, fund management history, etc. While past performance may not always be indicative of the future, it can help you understand the fundamentals of the fund, which in turn can help with fund selection.
The Chinese proverb says, “The best time to plant a tree was 20 years ago. The second best time is now.” The same is true with the case of SIPs as well. Consider the above factors and invest early to get the most out of your investment.