Master the Art of Choosing Best Mutual Funds for SIP
Posted: Sep 28, 2017
Discipline and consistency are two of the most important traits of any good investor. While the discipline eliminates greed and fear, enabling you to make informed, rational decisions, the consistency ensures continuous investment and wealth creation.
But it is not always easy, especially for the new investors, to develop these traits instantly. Investing in mutual funds through SIP can be an excellent solution to this problem. With SIP, you invest a fixed amount in a selected fund every month, making it a disciplined and consistent investment approach. But with so many schemes to choose from, how will you select the right mutual fund? The below-mentioned tips can help.
1. 1. Know your investment goal
With so many different types of funds, like equity, debt, tax-saving, etc. to choose from, it is not easy to select Best Mutual Funds for SIP. You can begin your research by first understanding your investment objective. Maybe you have a long-term goal of retirement planning, child’s marriage, or a short-term goal like renovating your home or buying a car. It is usually recommended that equity schemes are ideal for long-term goals and if you have a short-term goal, then it is better to stick with comparatively safer debt market schemes.
2. 2. Select a fund house carefully
There are now several fund houses that offer many different types of schemes. Once you have established the goal, your next step is to select a reliable fund house. Try to shortlist a few of them and then check their promoters, their experience in the industry, their reputation, and performance to make the right decision.
3. 3. Past performance of the fund
Once a fund house is selected, have a look at the schemes they offer and check whether or not they match your investment objective. While past performance in no way determines the future performance of a scheme, it is still a great way to judge the schemes. As per the returns in the last five years, the scheme should be at least in the list of top 10-15 schemes.
4. 4. Compare the important ratios
If you have filtered a few schemes that have provided consistent returns in the past few years and belong to a reliable fund house, you can eliminate a few options by comparing some important ratios. For instance, the TER (Total Expense Ratio) is an important ratio that you should consider. The expense ratio is a cost for the investors which the fund house charges for its expenses like the salary of the staff, marketing, and other expenses. Look for a lower TER scheme.
Some other ratios that you can consider include standard deviation which is the volatility of the scheme and Sharpe ratio which is the amount of risk that the scheme takes to generate better returns.
5. 5. Increase the SIP amount over time
Most schemes now allow you to start investing in SIP with as little as Rs. 500 or Rs. 1,000. While it is very important to start investing as soon as you can with as little amount as you can, make sure that you increase the SIP amount over time. Increasing the amount by 10%-20% every year is a great way to increase the total value of your portfolio significantly.
SIP is a powerful investment tool which brings an opportunity for new investors to invest in different market segments without any prior experience or knowledge. But your investment objective can only be achieved if you invest in a fund which suits your objective. Use the points mentioned above, and you’d probably make the right decision.
If you are planning for a long-term financial goal, a mutual fund Sip that suits your objectives and your surety of getting exceptional results can be an excellent option.