Investing Basics: 7 steps for newbies to invest in a SIP Plan
Investing Basics first steps. What are the exact procedures one totally ignorant person should follow to invest in SIP?
You could follow the investing basics first steps, as outlined below:
1. Get yourself a PAN (Permanent Account Number), if you don't have one. PAN number is mandatory for any financial/investment transaction in India, including Mutual Fund investments. Usually one receives the PAN card within 15-21 days of application. See the details for applying for a PAN card here.
2. Open a trading account with ICICIDirect or an Investment account with Citibank. If you already have a bank account with either bank, opening the investment or trading account is fairly simple. You will need to fill up some additional forms, and you can be ready to roll withing 7-10 days.
3. Next, you need to do some research, about the best funds to invest in. ValueResearchOnline is a good, independent research site dedicated to the mutual fund industry. Check out the top-rated funds here, funds that have a track record of atleast 5 years or more of solid performance. Do some more research, read what the analysts have to say about the fund, fund manager, and its track record, and things like risk/return.
Its generally not advisable to start SIP in funds that have performed best in the last 1 yr, only. Make sure to check what their record is over the last 3 yrs, 5yrs and since inception. Doing this, and reading the Fund Analysis will lead you to the funds with the best track records. This is where you should be investing your SIP money in. Why take chances with unproven funds when there are a host of great funds with super track records like SBI Magnum Contra, HDFC Prudence, etc. It is advisable to invest in only the 5-Star or 4-Star rated funds.
4. How do you pick which funds to invest in? Investment is all about
risk and return. So you must diversify your investments among funds of different styles. You can do that effectively once you have identified your individual risk tolerance.
5. Time to draw up your individual SIP plan now. Once you know your risk tolerance profile, you may be able to decide what type of funds you will be comfortable with. For example, a conservative investor may like to invest bulk of the portfolio in reputed Balanced Funds, whereas a moderate investor may like to spread his investments between reputed Balanced Funds and Equity-Diversified funds. An aggressive investor perhaps would like to put bulk of his investment in reputed Equity-Diversified funds.
Also, avoid investing in too many funds. You may end up in funds with similar styles and your returns will end up getting fragmented. Pick 4-5 funds at most and split your money equally to start with. If you have Rs. 2000 to put in SIPs every month, go for 2 funds that you like. If there is Rs. 5000 that you can spare, go for 4-5 funds. More than that, again split equally among the 4-5 funds.
The above allocation is a simple one that you can follow. However if you want to learn to do this the right way, you may like to read up more on
Where to invest: asset allocation principles. Actually, while you are there it may be a good idea to first educate yourself with the investing basics articles How to Invest: basic principles and How to invest: your investment profile, before going on to asset allocation.
6. Once funds are identified, you then need to use the SIP purchase option in ICICIDirect or RIS (Regular Investment Scheme) in Citibank. Choose the Fund Company, select the appropriate fund and click on SIP/RIS, enter monthly amount, and you are done!
7. Make sure to monitor your investments every 3-6 months. Check what returns the fund has given you. Periodically revisit Valueresearchonline to see what they have to say about your fund and its rating. If a fund consistently underperforms for 6 months to a year, its rating may have been downgraded. Follow the above research process to rebalance your portfolio, as necessary.
Related Investing Basics Articles, you may like to consider:
Advantage of a Systematic Invest Plan (SIP)| Good time to start a SIP?
Why should you invest
How to Invest: basic principles
How to Invest: your investment profile
Where to Invest: asset allocation
Return from Investing Basics: SIP plan to Investing Basics
Return from Basic Investing: SIP plan to Stock Market for Beginners