7 Key Factors to Consider When Choosing Mutual Funds for SIP Investments

Investing through Systematic Investment Plans (SIPs) has gained significant popularity among Indian investors due to its disciplined and hassle-free approach. Mutual funds offer a plethora of options for SIP investments, catering to various risk appetites and financial goals. SIPs offer a suitable opportunity for young investors to explore the field of investing with low minimum investment requirements. They encourage regular, disciplined investing, averaging out the cost of units over time.

However, choosing suitable mutual funds for SIP investments can be overwhelming for novice investors. There are a plethora of options available with varying risk and reward levels, and novice investors often choose funds that do not particularly align with their financial goals and risk tolerance. In this blog, we’ll examine seven factors that will ease the process of selecting mutual funds for SIP investments.

Defining SIPs

Before investing in mutual funds, one needs to be aware of what SIPs actually mean. 

Systematic Investment Plan (SIP) is a disciplined approach to investing in mutual funds. It allows investors to regularly invest a fixed amount at predefined intervals (usually monthly) in a selected mutual fund scheme. SIPs offer benefits such as rupee cost averaging, enabling investors to buy more units when prices are low and fewer units when prices are high, thus reducing the average cost per unit over time. This systematic approach helps inculcate financial discipline, harnesses the power of compounding, and is suitable for investors with varying risk profiles and financial goals.

Investors can do their research to find the best stocks for SIP investment on robust stock broker platforms like Share India. Share India offers a variety of stocks for mutual funds investment and SIP investments, empowering investors to achieve their long-term financial goals.

Factors to Consider When Choosing Mutual Funds for SIP Investments

Financial Goals and Time Horizon

The first wise step into the world of mutual fund investments is to be clear about the financial goals. Setting clear financial goals allows investors to determine their risk tolerance level and time horizon for which they can stay invested in the fund. Based on investment goals and time horizons, investors can explore different fund schemes and categories such as equity funds, debt funds, balanced funds, liquid funds, and many more.

Fund Performance

Evaluate the mutual fund scheme’s historical performance across different market cycles. Investors must look for consistency in performance over a considerable period, typically three to five years. Consistency over a longer time period, even during market downturns, indicates skilled fund management and a strong investment strategy. Additionally, analyse how the fund has performed relative to its benchmark index and peers.

Fund Manager Experience

SEBI has mandated that Asset Management Companies (AMCs) disclose the details of their fund managers. This highlights the importance of the role of a fund manager in mutual fund investments. A fund manager’s experience and investment philosophy are key factors that influence a fund’s success. Therefore, investors should conduct thorough research on the fund manager’s background, experience, past performance with other funds, and investment approach. When selecting a fund manager, it is advisable to choose someone with a consistent track record of making sound investment decisions.

Expense Ratio

The expense ratio represents the annual fees charged by an AMC for the administration, management, promotion, and distribution of a mutual fund. It heavily influences the mutual fund’s performance. A lower expense ratio reflects efficient cost management by the fund manager, thereby enhancing the fund’s attractiveness to investors. However, it’s not always wise to choose a fund solely based on a low expense ratio. Instead, investors should opt for funds that have a reasonable expense ratio to ensure cost efficiency in the long-term SIP.

AMC Track Record

Asset management companies (AMCs) are the companies that offer mutual fund schemes and manage them. Evaluating AMC’s track record is a crucial factor in selecting a mutual fund for SIP, as it reflects AMC’s credibility and reliability in managing investors’ money. Investors must look for AMCs with a strong reputation, a robust investment process, and a variety of successful funds across different categories.

Asset Under Management (AUM)

Asset under management, or AUM, is the total value of investments in a mutual fund scheme. It is a key metric used to assess the size and scale of an AMC and a crucial factor in selecting mutual funds as it provides insights into the fund’s popularity and liquidity. A fund with a substantial AUM indicates investor trust and confidence. However, excessively large AUM can sometimes hamper fund performance due to liquidity constraints.

Portfolio Turnover Ratio

The portfolio turnover ratio is a measure used to assess the frequency with which securities within a mutual fund’s portfolio are bought and sold over a specific period, typically one year. Each time securities are bought and sold in a mutual fund, a brokerage fee is to be paid, which is ultimately borne by the investor. Higher portfolio turnover indicates active management of the fund and high transaction costs involved. Therefore, this becomes a significant factor to be considered before investing in mutual funds.

Conclusion

SIP investment is a suitable long-term strategy for investors looking to achieve their long-term financial goals. However, before investing, it is pivotal to conduct thorough research and consider the factors that influence the performance of a mutual fund. Along with factors like risk tolerance, time horizon, fund performance, etc., it is crucial to keep in mind that diversification is necessary to manage risk effectively. Invest in SIPs across different fund categories to spread risk and achieve a well-balanced portfolio. By keeping these factors in mind, along with disciplined SIP contributions, investors can inculcate healthy investment habits and secure a stable financial future.