Mutual fund investments: 5 factors to weigh before you start an SIP

SIP or systematic investment plan is one of the best ways of investing in mutual funds. Investors can set aside a pre-determined sum for a determined period, on a fixed day of the month in a scheme. Units are allotted for the amount invested in each instalment. There are a few factors that need to be kept in mind while selecting the scheme for SIP.

Determine risk appetite
First, gauge your risk-taking ability. Schemes can be differentiated into low, medium or high risk, depending on the type of securities and asset classes these invest in. For medium risk appetite, it makes sense to invest in a balanced fund or a diversified large-cap equity fund.

Identify financial goal
Second, identify the goal for which you want to start the SIP. Once the goal is identified it is possible to decide the type of scheme, term, frequency and amount of SIP. A financial goal could be anything such as children’s education, marriage, house purchase etc.


Performance of scheme
Third, assess the performance of the scheme over one year, five years and since its inception in comparison with the benchmark index as well as peer funds. The scheme should have performed well consistently over a period of time.

Credentials of fund house
It is important to check the credentials of the fund house. The fund manager, assets managed by the fund house, the scheme’s AUM are important indicators you should look at. A long standing process-driven fund is likely to give consistent performance.

Costs
The expense ratio of the fund as well as loads charged at the time of redemption are also important factors that should be considered while selecting the scheme.

Points to note

• Consult a Sebi-registered investment adviser to help you choose the right scheme.
• Check the fund fact sheet, portfolio statement and websites that track fund performance.

(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)