Through a mutual fund SIP you can invest a fixed amount at regular intervals (monthly, quarterly or annually) in mutual fund schemes, which in turn invest in the markets. Being a flexible way of investing, SIP investment helps build long term wealth and instils the habit of disciplined investing even in the most undisciplined of us.
However, choosing the right mutual fund schemes for starting your SIP is critical for your investment success, and therefore, we suggest the following 6 points before starting a SIP mutual fund.
- Investment Objective: It is important to know what you are investing for. Is this for the long term or short term? Are you investing for a future financial goal? How much risk you can take with your investments and so on. The important thing is that if you know why you are investing then deciding which mutual fund to start SIP is easy basis your risk taking appetite and investment tenure.
- Fund type: Among the various category of mutual funds, it is important to know which type is suitable for your risk appetite.
- Equity Mutual Funds – These are the most preferred choice for doing long term SIP investment. The equity funds are further categorised into various types like, large cap, mid cap and small cap etc. These mutual funds are ideal if your risk profile is high to very high.
- Debt Funds – These funds are suitable for conservative to moderate investors. Depending upon your SIP tenure, you should choose an appropriate debt mutual fund.
- Hybrid Mutual Funds – Hybrid mutual fund investment is done in both, equity and debt instruments. This is suitable for investors with moderately to moderately high risk takers.
- ELSS Funds – SIP in ELSS mutual fund can be started if you want to save taxes under Section 80C.
- Fund performance & Returns: A review of historical performance of the mutual fund schemes you are starting your SIP investments is must. You must also check the return consistency and the mutual fund scheme performance compared to its peers.
- Fund House: The fund management practices followed by the AMC and its’ fund manager are important aspects. Try to know about the best practices it follows and track record of the schemes managed by it.
- Load structure of the scheme: there are no entry loads in mutual funds. Now, the only charge is exit load, which may be levied, when you are redeeming your SIP investment. Know the exit load details before starting the SIP.
- Scheme expense ratio: Also known as TER, it comprises of management fee, brokerage charges and administrative costs etc. Schemes with higher AUM usually have lower TER. Also, the passive funds like ETFs and Index funds have much lower TERs compared to active funds. You should check TERs in the mutual fund scheme information document