Systematic Investment Plans (SIPs) are emerging as one of the most favoured modes of investing in mutual funds. However, while it is easy to save money on a monthly basis in banks, it is not easy to choose your systematic investment plan to make investment periodically.
Questions such as when to start an SIP, deciding on an adequate amount as per your earnings and when to exit an SIP are some factors that come up when you’re doing your investment planning.
CS Sudheer, CEO and Founder of IndianMoney.com, says, “An SIP allows you to invest a fixed sum of money at regular intervals like daily, weekly or monthly in mutual funds which in turn invest in markets.”
Here are some factors that you should understand and consider before opting for an SIP in mutual funds:
Personal financial objective
All kinds of investing have to be goal-oriented in order to be fruitful. The same applies while deciding on SIP as an investment option. You need to be very clear about your financial goals.
Ask yourself these questions:
# Why am I investing?
# What is my risk appetite?
# For how long am I planning to stay invested in the fund?
“You have to classify the goals as short-term and long-term. Moreover, you need to know your risk tolerance. Once you are sure about these, you would be able to choose the appropriate fund. This, in turn, will help to accumulate the corpus required for goal accomplishment,” said Archit Gupta, founder & CEO ClearTax.
Fund returns are an important parameter that determines your decision to choose a fund. Before finalising your decision, you need to compare the funds on the basis of historical performance. “You may go for a fund which has not only performed well in the rising markets but also controlled losses in a falling market. This is not to say that fund performance is guaranteed and will be repeated in the future. But fund returns give you an overall assessment as to whether the strategy of the fund manager is working well or not,” said Gupta.
The expense ratio is the annual fee that the fund house charges you to manage money on your behalf. The expense ratio of a fund impacts returns to a large extent. A higher expense ratio translates into lower take-home returns. If your fund returns are 10% and the expense ratio is 1.5%, then the ultimate returns would be 8.5%. A lower expense ratio of 1% will escalate returns to 9%. Thus, while choosing an SIP, it is very important to analyse the expense ratio of the fund. Go for a fund which has a relatively lower expense ratio and high return generating capacity.
Check the fund size
A fund manager makes investments into various sectors from the pool of money invested by the investors. This total corpus constitutes the AUM size of a fund. You should ideally make an investment in a scheme which has high AUM base. “Take up an SIP in a mutual fund which has a total corpus or assets under management (AUM) of at least Rs 500 Crores,” Sudheer said.
Choose a fund that has a history
You should choose an SIP of a reputed fund house which has been around for five years or more. Make sure your SIP is linked to your financial goals. You can also go for Step-up SIPs that allow you to increase SIP amounts periodically.
Additionally, most SIPs offer you a feature where you can set an alert to suggest you to buy more when stock markets are down. SIP must be in conjunction with your bank. Contact your financial adviser at your bank, broker, or directly in AMC to help set up your SIP against mutual fund scheme.