Before you start with a mutual fund SIP investment, you must be aware of SIP. A systematic investment plan is a well-structured approach to investing in mutual funds. It lets investors invest regularly a specific amount at specific intervals in a mutual fund scheme. SIPs come with the benefit of rupee cost averaging, allowing investors to purchase additional units when the prices move down and fewer units when prices move up, hence minimising the average cost per unit. This approach also helps investors enjoy the power of compounding, inculcate financial discipline and align with investors with multiple financial goals and risk profiles.
Mutual Fund Selection: SIP Investments
To select the right mutual funds for an SIP investment, you must follow the tips given below:
- Fund performance
Make sure to monitor the historical performance of the mutual fund scheme across diverse market cycles, look for consistent performance over a specific period, usually 3 to 5 years. Consistency in performance over a longer duration, even after market downturns, represents a strong investment strategy and skilled mutual fund management.
- Financial goals
When entering the world of mutual investments via a mutual fund app, make sure to be clear about your financial goals. By setting clear goals, you can determine the time horizon and risk tolerance to invest in a fund. Investors can also browse multiple fund schemes and categories, like balanced funds, equity funds, liquid funds, and many more, on the basis of their time horizon.
- Expense ratio
Expense ratio is the annual fees that AMC charges for the management, administration, promotion, and mutual fund distribution. It influences the performance of the mutual fund. A lower expense ratio defines appropriate cost management by the fund manager, eventually boosting the attractiveness of the fund to investors. However, it is not wise to select a fund on the basis of a low expense ratio. Instead, investors must fund with a reasonable expense ratio to enhance cost efficiency in the long term.
- AMC track record
Asset management companies are the ones offering mutual fund schemes. Evaluating the track record of asset management companies is an essential factor when choosing a mutual fund for SIP, as it defines the reliability and credibility of the AMC in managing the money of investors. Investors must monitor the strong reputation and investment process of an AMC before investing.
- Portfolio turnover ratio
It is a measurement tool used to check the frequency with which security within a mutual fund portfolio is purchased and sold over a specific period, typically a year. Every time securities are purchased and sold in a MF, investors need to pay a brokerage fee. Higher portfolio turnover represents the fund’s active management, and high transaction costs are included. Therefore, the portfolio turnover ratio is an essential factor to be considered before making mutual investments.
Conclusion:
Investing in SIP is an efficient long-term strategy for an investor seeking success in long-term financial goals. However, before you invest in mutual funds, it is essential to perform in-depth research and consider certain factors influencing the mutual fund’s performance. Make sure to acknowledge the factors like time horizon, risk tolerance, and fund performance, along with prioritising diversification for risk management.