How to Choose an Ideal Mutual Fund Scheme for SIP Investment

As written on: 2^nd Feb , 2021

In today’s world, no matter what you want to purchase, there are always more than one option to choose from. Rarely do you come across a product category that has a monopolistic market. Be it buying apparels, booking a new luxury car, buying your dream house, or getting a smartphone, there are so many brands offering numerous products that investors are spoilt for choices. And sometimes it might get possible for us to get confused as to which product to choose from these endless available options. Same applies to financial products.

The Indian investment market has so many investment schemes, which is why sometimes traversing through these schemes and trying to figure out which one might actually benefit us can become difficult. Especially if you are new to financial planning and do not have any idea about how or where to invest your money. Financial planning may sound complex, but it is much simpler than that. If you are someone who is good at managing money, you are already a step ahead in financial planning.

Today’s young earners are struggling with managing their expenses. This leads them to get credit cards, something they start using as the month comes to an end. If you cannot sustain with whatever you earn even for a month, how are you planning to attain financial freedom in future? The young generation wants to live in the present, which is completely fine. But you cannot ignore the fact that at some point of time, you will have to focus on building a corpus for the future. You are going to need more money to survive in future than you need now. Hence, it is advisable that you learn how to manage your expenses and also start saving from your monthly salary. Financial planning can teach you how to do that. Financial planning requires individuals to make a list of their short term and long term financial goals. Prioritizing your goals is essential for anyone who wishes to climb the ladder of financial success. That’s because when you have a clear idea about what it is that you want to achieve in life, you may not drift away from it in the future. Having vague financial goals is also not a good idea. Just because your colleague got a brand new car that doesn’t mean that you too add that to your list of goals.

Remember that every individual has different liabilities, responsibilities and different investments too. For example, the colleague who got a luxury car may not have any existing loans, but you may have taken an education loan for your child’s overseas education expense. Hence, you cannot replicate the goals of your peers of colleagues while financial planning. This doesn’t mean that you cannot buy a luxury car ever in your life. At that point of time, because you are already paying off a costly loan, your priority can be investing regularly with a long term investment horizon to build a retirement corpus.

Remember that this was just an example to help readers understand how to prioritize their financial goals. Having a defined set of goals might also help retail investors in determining how much capital they need in hand for making the initial investment. This will automatically motivate them to start saving on a regular basis. Once you know your goals and have a decent capital in hand to make an investment, the next step is understanding your risk appetite. An individual’s risk appetite defines their ability to take XYZ amount of risk with their finances and invest in a scheme hoping that the scheme will potentially offer capital appreciation at some point of time in future. Every individual’s risk appetite is going to vary depending on their age, income, existing liabilities, etc. There can be individuals who have crossed the age of 50 but are still looking for aggressive investments as they have already planned out their retirement beforehand. On the other hand a young individual who is entirely new to investing may not want to take any risk with his/her finances and prefer sticking to conservative schemes. This may contradict with the earlier statement but that’s the truth. Every individual’s risk appetite may vary depending on several factors and you too should take everything into consideration before determining your risk appetite and your risk tolerance. Conservative schemes available in the market generally offer fixed interest rates. Such investments may or may not help someone accumulate wealth or achieve their long term financial goals.

If you are someone who doesn’t wish to settle with fixed interest rates and do not mind investing in market linked schemes to give your investment portfolio a slight aggressive approach you can consider investing in mutual funds.

In the recent past, mutual funds have caught the attention of Indian investors. A mutual fund is a pool of funds that is usually managed by a fund manager that the fund house/AMC hires. The duty of the fund manager is to study the market and buy/sell securities in tandem with the scheme’s investment objective.

This is what SEBI the regulator of securities and commodities in India, has to say about mutual funds-

“Mutual funds are a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the offer document.

Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with the quantum of money invested by them. Investors of mutual funds are known as unitholders.

The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.”

Before we go ahead and determine how to choose a mutual fund scheme for SIP investment, let us understand what SIP stands for. SIP refers to Systematic Investment Plan and it is a way to invest in mutual funds.

What is a Systematic Investment Plan?

Systematic Investment Plan or SIP have become so synonymous with mutual funds that some new investors are confusing SIPs to be mutual funds. This is not the case and like we stated earlier, a mutual fund SIP is a mode of systematically investing in mutual funds at regular intervals. Mutual fund houses generally offer investors seeking mutual fund investments with two payment modes – they can either make a lumpsum investment, which is one time investment, or they can opt for a SIP. Lumpsum investment is generally preferred by those who have surplus cash parked and wish to receive more mutual fund units all at once. Mutual fund investors who invest by making a lumpsum investment expose their entire investment amount to the market's volatile nature because they have to make this investment right at the beginning of the investment cycle.

Systematic Investment Plan or SIP is an easy and hassle free process to continue investing in mutual funds for a longer time period. If you want you can start a mutual fund SIP from the comfort of your smartphone or laptop, but you need to be a KYC compliant individual to do that. Investing in a mutual fund via SIP has its own merits.

SIP is supposed to inculcate the habit of regular investing in an individual. Those who wish to fulfil long term financial goals like retirement planning or buying a new house, such individuals need to build a decent corpus over a period of time. In order to build such a large corpus, one may have to remain invested in mutual funds in the long run. If you start a mutual fund SIP, it helps you invest small amounts at regular intervals. If you are committed to your investments and do not miss out on making regular investments in mutual funds, you might be able to get closer to your ultimate financial goal.

Compounding in mutual funds means interest earned on your principal amount being reinvested in the original amount, which acts as the principal amount for your next investment cycle. If you start investing in mutual funds via SIP at an early stage, you have the opportunity of turning small investment amounts into a large corpus. Another plus point of starting a mutual SIP is that it holds the potential to benefit from the market’s volatile nature. When the market goes down, the NAV of the fund invested may go down based on stocks invested, thus resulting in more number of units being added to the unit holder’s account. When the market goes up, this results in an increase in the NAV of the fund. This way, the market value of your allotted units increases as well.

Choosing the right mutual fund for SIP investment

It is true that sometimes narrowing down to the right mutual fund can become a task in itself. If you are new to financial planning or mutual fund investing and wondering how to choose a suitable mutual fund scheme through SIP investment, here are a few to bear in mind:

What is your investment objective?

Ideally, every individual, before investing their hard earned money in any financial scheme, should be asking themselves the main reason behind their investment. That’s because if you wish to invest to meet long term goals like retirement corpus, you may need to invest in equity oriented funds. On the other hand, if you have short term goals to achieve, you may want to choose from different debt funds available. Also, for meeting medium term goals, one may opt for hybrid schemes, which are a mix-match of equity and debt funds. So, having a realistic financial goal always helps in understanding the kind of mutual fund one should invest in.

Invest in a scheme that aligns with your risk appetite

Remember that mutual funds invest in equity markets, making them a high risk investment. Also, these funds are not obligated to give their investors a fixed income. That’s because returns from mutual funds are never guaranteed. In fact, there is no guarantee that one may even receive their original investment amount. Hence, it is better to understand your risk tolerance before investing in the type of scheme or fund.

Do track the mutual fund scheme’s past performance

Before you invest in any mutual fund, you should first take a look at the past performance of that fund. It is better that you check the track record of the fund and also take a look at its past three months, six months, one year, 3 three years, and five year performance. Although it is true that a fund’s past performance may not reflect on its present or future performance, it gives investors a rough idea of whether the fund is worth investing in or not.

Watch out for the fund management

When you invest in mutual funds, remember that you are entrusting your hard earned money at the hands of the fund manager. It is the duty of the fund manager to buy/sell securities in accordance with the scheme’s investment strategy to meet its investment purpose. Hence, it is essential that the fund is in the hands of an experienced fund manager.

We hope that the above pointers come in handy when making a mutual fund investment decision. But if you think that you need more guidance, you can always consult a mutual fund advisor. Do not rush towards any investment decision and do enough research before investing in a mutual fund. Investing is a long journey and investors need to be patient if they want to stand an opportunity to get closer to their ultimate financial goal. Mutual funds do not promise or guarantee any type of capital appreciation so it is advisable to diversify your investment portfolio with other assets too, To select the ideal mutual fund, consider downloading our mutual fund app.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.