Selecting the best from among a myriad of systematic investment plans (SIPs) is confusing for most people. The factors to analyse are crucial in determining whether your fund provides above-average returns. There are many factors that one needs to take into consideration when diving into the world of SIPs. Here are five factors you need to remember when choosing from among systematic investment plans:
Narrowing on your investment Objective
Many people think that investing in mutual funds can only help them with tax-saving or with an avenue to park their extra cash. However, what most people are not aware of is that mutual funds can help you achieve your financial goals as well. Before you invest in SIP, it is essential to narrow down on your investment objective and have a clear goal in your mind. You need to know about your risk appetite and whether you want to invest in SIPs for the long run or the short run.
Selecting the right fund type
Your risk appetite determines which fund may be suitable for you.
The funds are broadly classified in two types:
Asset-based classification means the type of assets the fund holds as is explained below:
- Equity funds are classified as per their sector and the market capitalisation of the companies
- Debt funds are those that rely on capital appreciation through investment in Treasury bills and deposit certificates. Their primary assets are debt instruments
- Balanced funds blend equity and debt combinations and provide the best returns to the investor
Structure-based classification is further divided in two parts:
- Open-ended funds allow entry and exit at any point during the tenure
- Close-ended mutual funds have limited durations during which a new investment can be made. No further fresh investment can be made in such funds once the new fund offer (NFO) period closes
Studying the fund’s performance history
When exploring SIPs, it is important to look at the performance history of the fund. A smart thing to do when investing in systematic investment plans is to study and compare the market trends to gauge whether they can sail through market volatility. Not only that, it is essential to check the total expense ratios (TER); funds with lower TER are preferable as high expense ratio funds can hamper your fund’s performance in the long run.
Choosing the right fund house
A good fund manager and fund house are crucial for the fund to generate above-market returns in SIPs. You must gather adequate information about past fund history and check whether the performance of the fund is in line with your objectives. Such information can be sought from the scheme information documents. Along with this, a list of various schemes offered, investment in different sectors for a diversified portfolio, and the likes are some pointers to keep in mind while selecting a fund house.
Entry and exit load are a form of fee levied on investors by the fund house when entering and exiting the fund. Of late, the Securities Exchange Board of India (SEBI) has removed entry load to encourage SIPs. Thus, now investors only have to pay exit load on redemption of SIPs. To understand the concept of exit load, let us look at an example.
Fund Value at redemption: Rs10,000
Exit Load: 2%
Thus, Exit Load charged will be Rs200 and you shall receive an amount of Rs9800 on redeeming the fund.
Apart from the above, you should keep in mind to select the right date for your SIPs, taking care of the credits and debits in your account, as well as setting a timeline to switch between different schemes. If you get these pointers right, understanding and selecting the best fund to meet your investment goal is a five-finger exercise.