SIP or Systematic Investment Plans is now one of the most popular ways of investing in mutual funds in India. However, most new investors are wary of mutual fund SIPs, and a lot of seasoned investors to struggle to get their strategy right in terms of finding the best mutual funds for SIP. Therefore, before jumping on to choose the best mutual fund SIP for your investments, let’s first see what SIP or systematic investment plan means for an investor.
What is a SIP or systematic investment plan?
A SIP or Systematic Investment Plan helps investors invest a fixed amount at regular intervals (weekly, monthly, quarterly or even daily) in mutual fund schemes, which in turn invest in the equity or debt markets depending upon the scheme category and mandate. Mutual fund SIPs being a flexible way of investing help one build long-term wealth and instills the habit of savings even in the most undisciplined investors.
The major benefit of investing through SIPs is the power of compounding, rupee cost averaging, and compounding benefits over and above the core benefit of saving small amounts in a disciplined manner.
How to choose the best mutual funds for SIP?
Choosing the best mutual funds for your SIP is very critical for your investment needs and therefore, you need to know the following 6 things –
- What is your investment objective?
Before finding the best mutual funds for SIP, it is important to know what you are investing for. You need to ask yourself questions like 1) are you investing for the short term or the long term 2) what is your risk profile? Your investment horizon and risk profile as knowing these will help you in determining which type of fund will suit you.
For example - if you are investing in the short-term and okay with moderate and consistent returns debt funds might be suitable for you. However, if you are investing for the long-term horizon, equity mutual fund schemes can be suitable for you as it has the potential of generating the highest return comparable to other fund categories as well as asset classes. - What are the mutual fund types?
As mutual funds are of various types, it is important to know which type is suitable for your risk appetite thus it can become your best mutual fund for SIP. Let’s take a quick look at the various types of mutual funds:
Equity Mutual Funds – Equity mutual funds are the most preferred choice for doing long term SIPs. The equity mutual funds are further categorized into various types like large-cap funds, diversified equity funds, mid & small-cap funds, Index Funds, and sectoral and thematic funds. Equity mutual funds can become your best mutual funds for SIPs if your risk profile is moderately high to high.
Debt Funds – debt mutual funds can be further classified based on the investment tenure and your investment needs. For example – long term debt funds, short term funds, ultra-short-term funds, and liquid funds. Depending upon how long you want to continue your SIP, you should choose an appropriate debt fund. These funds can be suitable for investors with conservative to moderate risk-taking ability.
Balanced Funds – These are also called hybrid mutual funds as it invests in both, equity and debt instruments. While the equity portion provides the return kicker the debt portion provides stability to the portfolio. Balanced funds can be the best mutual funds for SIP if your risk profile is moderately high.
ELSS or tax saving mutual Funds – SIP in ELSS funds can be started if you want to save taxes under Section 80C. ELSS Funds are essentially diversified equity funds and can be your best mutual funds for SIP of your risk profile is moderately high to high and the need is to save taxes along with regular investments. - Mutual fund performance & returns
A comparison of the historical performance of the scheme you have chosen as the best mutual funds for your SIPnot only tells you how strong or weak the fund was but you must also check whether the chosen scheme has a consistent track record of beating the category average returns and benchmark returns and how the scheme fared compared to its peers in the group. - Fund House (AMC)
The fund management practice and the investment process followed by an AMC and the fund manager/sare very important aspects of fund management in the interest of the unitholders. Before investing, you should know more about the AMC, the fund manager’s track record of managing the various schemes along with the scheme that you intend to start your SIP in. You should read the scheme information document (SID) and key information memorandum (KIM) to know about the fund house’s investment approach, the scheme investment objective, etc. - Entry and exit load of the chosen scheme
Around 4 years back, The Securities and Exchange Board of India (SEBI) stopped fund houses from levying any entry loads on any mutual fund schemes. Now, the only charge you might pay is the exit load if you redeem your SIP units before the exit load period. The information about exit load is available on the application form and the Key information memorandum or KIM. - The expense ratio of the scheme
You might have chosen the best mutual funds for SIP but have you checked the expense ratio of the scheme? What is the expense ratio? The expense ratio comprises the management fee, brokerage charges, and administrative costs, etc. and charged to the scheme annually. Mutual fund schemes with higher assets under management (AUM) usually have lower expense ratios as you can see in the following example in the case of equity funds –
On the first Rs. 100 Crores of the daily net assets – 2.50% p.a.
On the next Rs. 300 Crores of the daily net assets – 2.25% p.a.
On the next Rs. 300 Crores of the daily net assets – 2.00% p.a.
On the balance of the daily net assets – 1.75% p.a.
Therefore, if your selected scheme has a higher AUM it will charge you lesser expenses and thus increase the returns.
People Often Ask
- Which is best SIP or mutual fund?
The best SIP as per Indian markets are
- Which SIP gives highest return?
The SIP that gives the highest returns are
- Which date is best for mutual fund SIP?
Any date of the month which is suitable to you is best for your mutual fund SIP investment. - Is Weekly sip better than monthly SIP?
Weekly SIP helps in achieving your financial goals easily as the investment amount is higher than the monthly SIP. - Is SIP better than FD?
Yes, SIPs offer higher returns and are more in sync with the market, FD is the best-suited investment decision for conservative investors. SIP is also better than RD.
Conclusion
Therefore, before starting a mutual fund SIP and finding the best mutual funds for your SIP, you should know the above 6 things so that the selection of your best mutual fund for SIP should also be fitting to your risk profile, investment objectives and thus make your SIP investment journey more meaningful and result oriented.
If you have chosen the best mutual funds for SIP, it is time you know how to start a SIP in a mutual fund