Mutual funds have fast become an investment choice for many owing to the convenience and range of choices – in asset classes, tenure, minimum investment, etc. And systematic investment plan (SIP) is one of the easiest and convenient ways to invest in mutual funds.
What is SIP?
One of the most important qualities of SIP is that it encourages financial discipline in your life. SIP allows you to invest a fixed amount in a mutual fund scheme on a regular basis – monthly, quarterly or even annually, you choose! As per your instructions given to the bank, the said amount is deducted from your savings account and directed to the particular mutual fund scheme/s.
Advantages of SIP
Financial discipline and a systematic method of regular investment are just two positives of investing in mutual funds through SIPs. There are more:
- Compounding :The power of compounding – supported by an investor’s patience and consistent investments, though small – can bear great fruits over time. Compound interest earned regularly on deposits can boost the growth of your investments significantly over the long term.
- Rupee cost averaging: When the investment is made in a volatile stock market, SIPs can average out your cost per unit over time.
- Can begin small: You can begin an SIP investment with as low as Rs 500 per month.
- Flexible: SIP gives you a lot of flexibility to make your own choices – amount, date of investment, fund category, time, etc.
- Tax saving: SIP can be started in ELSS funds as well, which have the smallest lock-in period of just 3 years. So you can save tax and grow your money, with the ease of SIP investments.
- Easy withdrawal: The positive of easy redemption can make your SIP investment act like an emergency fund when needed.
How to choose best mutual fund for SIP
Choosing the right mutual fund to make SIP investments is crucial to ensure high returns. Therefore, keep the following points in mind before making the choice
- Investment Objective: Before making any investment decision, it is vital to know its objective, which in turn also decides the tenure of the investment.
- Type of Fund: Being aware of your risk appetite will help you decide on the type of fund. If you are risk-averse and prefer a consistent inflow of money, then choose an SIP with debt funds. On the other hand, if you have the risk appetite to invest in the stock market for the long term, then choose an SIP with equity mutual funds. Within this, there are various other types – open-ended, close-ended, theme or sector based, etc. to choose from.
- Performance & returns: Historical performances and returns of mutual funds should be studied well. It is suggested that you compare your shortlisted mutual fund schemes on the basis of returns over at least 3 to 5 year period. Also compare performances to the benchmark indices. A good mutual fund will rise with the market, but should not completely collapse when the market witnesses a downturn.
- Fund House: The fund house of a mutual fund scheme decides on the investment approach and its decisions play a major role in a mutual funds’ growth and capacity. Therefore look for fund houses that have a long and consistent track record and the performances of its past schemes to decide on the most appropriate fund house to choose from.
- Expense Ratio: One of the ways to compare two mutual fund schemes within a category is the expense ratio. This ratio comprises of the fund’s yearly fees, therefore a high ratio will not only negatively affect your overall returns, but also impact the fund’s performance in the long term.
- Exit Load: This is the charge that you have to pay if you exit the mutual fund before a said time. Be aware of this fee as a higher exit load will affect your returns on exiting the fund.