SIP is a simple and efficient way to invest in mutual funds. But with thousands of mutual fund schemes now available, how will you pick the best? We have 5 handy tips to help you out.
Systematic Investment Plan or SIP is an excellent way to invest a small amount of money into mutual funds on a regular basis. SIPs are a phenomenal hit in India and are largely responsible for the increasing popularity of mutual funds in the country. But be it a lump sum investment or SIP, it is very important that you select a fund very carefully.
With thousands of mutual fund schemes now available, new investors often end up selecting the wrong scheme for their SIP. If you are planning to start SIP, the tips mentioned below can help-
- Check the total AUM
The AUM (Asset Under Management) or asset size is the total amount of money managed by that particular mutual fund scheme. It is usually recommended that you should pick schemes with large AUM. You can consider Rs. 500 crores as a reference point.
While there are some great funds with AUM lower than Rs. 500 crores, but as you are new to mutual funds, it is better to stick to this rule.
- When was the Fund Launched?
Fund houses launch new mutual fund schemes on a regular basis. Just like the AUM, the longer the duration for which the fund has been in existence, the better it is. Five years can be an excellent reference point.
If there is a fund that has been on the market for more than five years and has AUM of more than Rs. 500, it is a good sign. Avoid investing in funds that have been recently launched unless you have some experience with mutual funds.
- Which Fund House Operates the Scheme?
The fund house or fund family is the next important consideration. There are now several fund houses in India with hundreds and thousands of mutual fund schemes.
Rather than trusting any new fund house, it is better to stick to a fund house that has been in this business for a long time. They should have proven track record and excellent market reputation.
- Find as Much About the Fund Manager as Possible
Every mutual fund scheme has a fund manager who is responsible for making investment decisions on your behalf. The reputation of the fund manager is also very important for a mutual fund scheme.
You can visit the official website of the fund house to find details about the fund manager of the selected fund. There should be at least some information about the fund manager’s experience, investment philosophy, their track record, etc. Know as much as possible about the fund manager to pick the right fund for SIP.
- Go Through the Expense Ratio
Think of expense ratio as the management fee you pay to the fund house for managing your investment. This amount is directly deducted from your investment. The expense ratio can be different between best mutual funds for SIP, and you should surely check it when analysing a fund as the expense ratio lowers your returns.
Most of the funds usually charge 1.5% as the expense ratio. While you might not think of this 1.5% much when the fund is generating 15% in a year, it’ll surely prove a major disappointment when the fund starts performing badly.
If you want to invest in mutual funds through SIP, these tips can help you spot the right fund. No matter what kind of fund you select, remember that every fund carries some amount of risk. Give some time to the selection process, and you can surely pick gems for your portfolio.