How to Choose A Suitable Mutual Fund For SIP Investment

Mutual funds hold the potential to offer investors some returns, and you too shouldn’t shy away from learning a few things about them. It’s better to understand something then turn a blind eye on it just because someone says they are ‘risky’. Well, folks let us help you enlighten with the fact that no investment is considered to be safe, there’s always some risk involved and you too, depending on your risk appetite invest within your boundaries.

Investors of all age have to keep in mind that those who are goal oriented tend to be successful with their investments. The earlier you realize the importance of setting long term investment goals, the better it is. Especially if you are considering investing in mutual funds. Mutual funds can be one of the ways for young investors to get a taste of the market and how it functions. That’s because mutual funds diversify their portfolio by investing in equity, debt, government securities, bonds and other money market instruments. They offer a higher risk return ratio (although this might not be true every time). But just because mutual fund investments are subject to market volatility, that doesn’t necessarily mean investors will have to bear losses compulsorily. Long term investments stand a chance to beat market volatility and hence, if you have a moderately high risk appetite, you can consider investing in mutual funds.

Usually, there are two investment options – you can either pay your mutual fund premiums with a lump sum amount, where you pay at the beginning of the investment cycle, or you can give your investment a systematic approach by investing through SIP.

SIP or Systematic Investment Plan is one of the methods to invest in mutual funds. SIP allows investors to pay a fixed amount at regular intervals, generally every month, on a predetermined day. When an investor chooses to invest smaller amounts at fixed intervals instead of opting to pay the entire premium at the beginning of the investment cycle, they are minimizing risk and help their investment stay away from market volatility. In SIP a fixed amount is debited from your savings account every month and credited to the mutual fund you’ve invested in.

With an example, let us understand how SIP works:

Say you want to invest Rs. 360000 annually in a mutual fund scheme but do not have the entire amount at the time of investment. With SIP, you can invest Rs. 30000 every month and the amount will automatically get debited from your savings account and transferred to the mutual fund scheme.

SIP allows investors to start investing with minimum amount as mentioned under respective Scheme Information Document of the concerned scheme. Investors can choose how much to invest and can also predetermine their intervals, i.e. whether they want to invest monthly, quarterly or every six months.

If you are planning to invest in a mutual fund via SIP and looking for some tips on how to choose the right fund, read further:

1. Identify your risk appetite

The very first thing for any investor to do before making any investment decision is to identify their risk appetite. This might help them in choosing a fund that has a diversified portfolio. Before putting your money in any investment scheme, ask yourself if you are ready to take some amount of risk. An individual’s risk appetite might play an essential role in deciding which type of mutual fund is more suitable for you. Make sure you understand your risk appetite before investing.

2. Invest in funds that have performed consistently over the years.

Investors need to understand just because the fund has churned good results over the past year, it won’t necessarily continue to do the same in future as well. Hence, they should try and judge a scheme not just based on past one year’s performance, but check its consistency over the past five to seven years. If the fund has managed to churn consistent returns (even though they were a bit low) over a long period, this means the fund is in the hands of proper management, and there are chances of you gaining some profits as well. Remember that it is not always about making higher profits; consistency is essential. Hence, don’t get tempted by looking at a scheme’s current performance and make your investment decision.

3. Invest in a fund that shares the same investment objective as yours

There are a plethora of schemes in the market, each bearing a unique investment objective. Invest in a scheme which you share a common investment objective with. It is always advisable to invest in a scheme which has the potential to help your reap some benefits.

4. Invest in a mutual fund that has a low expense ratio

If you are investing in mutual funds, you better have a long term investment horizon. That’s because mutual funds have the tendency to outperform and beat their benchmarks when held over a long period of time. Also, investors, while choosing a fund, must make sure that the fund has a low expense ratio. An expense ratio refers to the price of owning a fund. The expense ratio of a fund may have an impact on the returns provided by the scheme. Hence you should also be aware of the expense ratio being charged by the mutual fund scheme.

Here's another tip to make sure your investments are helping you achieve your long term goals. Investors can refer to a SIP calculator to get a fair idea of how much corpus they can accumulate with through their monthly SIP investment. We hope that the above pointers come in handy when you make your investment decision. Invest smartly and within your limits. This way, you stand a chance of getting closer to your ultimate financial goal.

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