Starting a SIP is one of the best investment decisions that can be taken to inculcate financial discipline and consistency. SIP allows the investor to invest a fixed amount regularly, starting with as low as Rs 500. It provides the advantage of rupee cost averaging and promotes conservative investing, particularly in erratic markets. This helps in building wealth over time and reduces the impact of market fluctuations. To make maximum use of your SIP investment, you would need to choose the right mutual fund. Here are five tips that will help you get the right mutual fund for your SIP investment.
1. Define Your Investment Objective
Before beginning an SIP, you should have a clear idea of what you want out of it. Many people invest in mutual funds just to save taxes or park some extra cash. However, mutual funds might be more than just a source of tax savings. Mutual fund investments can help you achieve a range of financial goals, both short and long-term. Choose what your financial goals are: Will you be investing for any short-term need or have a long-term objective such as retirement? Knowing this is going to guide you in your choice of the right mutual fund for your SIP
2. Select the Right Fund Type
Choosing the right kind of mutual fund is very important for SIP success. Mutual funds come in categories that suit different risk profiles. If you are risk-averse and expect stable returns, debt funds would be your best option. Debt funds invest in bonds or other debt securities, offering more stability. On the other hand, if you are looking for higher returns and are ready to take on more risk, equity funds (stocks) might be more appropriate. Here is a detailed classification of the types of mutual funds you can consider for your SIP.
- Equity Funds: These funds invest in stocks and are suitable for long-term growth. They can be further divided into large-cap, mid-cap, small-cap, sector funds, and index funds.
- Debt Funds: These funds invest in debt securities such as bonds. They are apt for a risk-averse investor desiring stable returns.
- Balanced Funds: These include funds that invest in stock and bonds. This includes a mix of growth coupled with stability.
- Structured Mutual Funds: These are open-ended and close-ended funds. Open-ended funds have flexible entries and exits. Close-ended funds have a fixed investment term.
3. Evaluate the Past Performance of the Fund
As in selecting the mutual fund that would make up your SIP, the past performance of mutual funds has to be gauged. Past performances of any fund give indications on whether it has behaved in most of the prevalent market conditions. For greater analysis, observe the returns from this mutual fund across a term length like the previous 5-10 years. Make intercomparison for the same terms to figure out if similar mutual funds could survive extreme situations. Remember that past performance is no guarantee of future results, but it can give an idea about how the fund might behave in the future.
4. Select a Trustworthy Fund House
Selecting a good fund house is also as important as selecting the right fund. A reliable fund house offers various schemes with different strategies to align with different investment objectives. Proper screening of fund houses would involve research into their reputation, investment philosophy, and track record. Ideally, one would choose a sound and reputable fund house with a consistent approach, which will generate good returns over time. However, investing in the wrong fund house may end in loss of investments or poor returns. Care should be taken to assess the fund house before making a final decision about it.
5. Assess the Expense Ratio
The expense ratio is also an essential criterion in choosing the mutual fund for your SIP. That is the fee the fund house charges for the management of the fund. A larger expense ratio implies greater fees to be paid that may translate into lesser returns for you, eventually. It is, therefore important to choose funds that have a low expense ratio because even small differences in fees can have an enormous effect on your investment over time. Choose funds with a reasonable expense ratio to ensure that most of the returns generated by your investment do not get consumed by the fees.
Conclusion
Choosing the right mutual fund for your SIP is essential to meet your financial goals. In the case of selecting the suitable type of funds, past performances, a respectable fund house, and considering an expense ratio, you would be choosing well. Axis Mutual Fund App is one such user-friendly mutual fund invest app from which new investors and first time investors (KYC verified) can start investing along with existing investors under the same scheme. Don’t forget to monitor the SIP at regular intervals and make changes accordingly, so the investments move in tandem with your financial goals over the long run.
