Should I start a SIP at 25 as a fresher?

Ans: Congratulations on planning to start your SIPs at the age of 25! Starting early gives you a huge advantage in wealth creation over the long term. In this detailed guide, I will share how you can begin your journey with SIPs and build a stable and growing financial portfolio over time.

Understanding the Basics of SIP
A Systematic Investment Plan (SIP) allows you to invest small amounts regularly in mutual funds. It is an excellent way to build wealth through disciplined investing over time. You don’t need to worry about timing the market. SIPs help in spreading the risk over time and benefit from compounding.

Identifying Your Financial Goals
Before starting any investment, it is essential to define your financial goals. Think about your short-term, medium-term, and long-term goals. For example, you might want to:

Build an emergency fund
Save for a car, vacation, or higher studies
Accumulate wealth for retirement
Defining your goals will help you decide the amount to invest and the right mutual funds for you.

Assessing Your Risk Tolerance
At 25, you have time on your side. You can afford to take higher risks in the early stages of your investment journey. However, it’s important to assess your risk tolerance carefully. Ask yourself: Are you comfortable with short-term volatility? Or do you prefer stable, lower-risk investments?

If you are willing to take some risk, equity mutual funds can provide better returns over time. For those who prefer safer options, debt mutual funds could be a better choice.

Deciding on Your SIP Amount
Start with a realistic amount that you can comfortably invest every month. Even if it’s a small amount like Rs 1,000 or Rs 2,000, it’s a great start. As your income increases, you can gradually increase your SIP amount.

Make sure that the amount you choose doesn’t affect your essential expenses. You want your SIP to be sustainable over the long term.

Selecting the Right Mutual Funds
While selecting mutual funds, there are a few things to consider:

Actively Managed Funds: These funds have professional fund managers who actively make decisions to generate higher returns. Though they have slightly higher fees, the potential for better returns justifies it.

Avoid Index Funds: Many people think index funds are a good option because of low fees. But they track the market, so you miss out on the chance of better returns through active management. Actively managed funds, guided by experienced fund managers, may outperform the market over time.

Regular Plans Over Direct Plans: Regular mutual funds come with the added benefit of working with a certified financial planner. This professional guidance ensures that your investments are aligned with your financial goals. Direct plans may seem cheaper, but without expert advice, you may end up making wrong choices.

Ensuring Proper Diversification
Don’t put all your money into one type of fund. It’s important to diversify across different types of mutual funds.

Equity Funds: For high returns, allocate a major portion of your investments here. These funds invest in stocks of companies and offer growth over time.

Debt Funds: These are safer options that provide stability. They invest in fixed-income instruments like bonds and are less volatile. You can allocate a smaller percentage of your portfolio here.

Hybrid Funds: These are a mix of equity and debt, giving you a balance between risk and reward.

Diversification helps to minimize risk and protect your investments during market downturns.

Emergency Fund
Before you dive fully into SIPs, make sure you have an emergency fund in place. Ideally, this should cover 3 to 6 months of your essential expenses. You can keep this amount in a liquid mutual fund or a savings account for easy access.

Having an emergency fund gives you financial security and ensures that you won’t need to withdraw your investments in case of an emergency.

Life Insurance and Health Insurance
At this age, it’s essential to protect yourself and your family from unforeseen situations. Consider taking a term life insurance policy to provide financial security to your dependents. It’s much cheaper to buy life insurance when you’re young.

Don’t forget health insurance as well. Having a comprehensive health insurance policy will protect you from unexpected medical expenses.

Insurance ensures that you don’t have to dip into your investments for health or life emergencies.

Tax Benefits from Mutual Funds
Mutual funds offer some tax benefits which you should take advantage of:

Equity-Linked Savings Scheme (ELSS): These funds allow you to claim a tax deduction of up to Rs 1.5 lakh under Section 80C. They also have a lock-in period of 3 years and invest in equity, offering good long-term returns.

Capital Gains Taxation: Be mindful of the tax treatment of mutual funds. Equity mutual funds held for more than 1 year qualify as long-term capital gains (LTCG) and are taxed at 12.5% for gains above Rs 1.25 lakh. If you sell them within a year, the short-term capital gains (STCG) are taxed at 20%. Debt funds are taxed according to your income tax slab.

Automate Your SIPs
Make it easy for yourself to invest regularly. Set up an automatic debit from your bank account on the same date every month. This will help you maintain discipline and consistency without the need to remember each month.

SIPs also work best when you stick to them over the long term, allowing your investments to grow with compounding.

Reviewing Your Portfolio Regularly
As you progress, it’s essential to review your SIPs and overall portfolio every 6 to 12 months. This will help you track your performance and make adjustments if necessary. Over time, you may want to increase your SIP amount or change the allocation between equity and debt funds.

Avoid Emotional Decisions
The stock market will always have ups and downs. It’s crucial to stay invested through all market cycles. Avoid reacting to short-term fluctuations. SIPs work best when you stay committed for the long term. When the market is down, your SIP buys more units, which will benefit you when the market recovers.

Final Insights
Starting SIPs at 25 is a fantastic decision. It’s one of the best ways to create wealth over time, thanks to the power of compounding.

Here’s a quick recap of your next steps:

Define your financial goals and risk tolerance
Decide on a comfortable SIP amount
Choose actively managed mutual funds over index funds
Opt for regular plans with certified financial planner guidance
Diversify across equity, debt, and hybrid funds
Build an emergency fund and secure insurance coverage
Automate your SIPs for regularity
Review your portfolio periodically and avoid emotional decisions
By following these steps, you’ll be on the right path to achieving your financial goals. SIPs provide a disciplined, systematic way to build long-term wealth.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment