To invest smartly in mutual funds, you need a carefully planned strategy. Investing is a continuous process that demands regular attention, expert insights, timely portfolio rebalancing, and, above all, discipline. However, with today’s busy lifestyle, balancing multiple responsibilities like work, family, and household chores makes it challenging to invest time and energy in financial planning. This is where the Systematic Investment Plan (SIP) helps.


An SIP is an investment strategy that allows individuals to invest in mutual funds according to their preferred frequency and amount. This approach encourages disciplined and regular investing, facilitates goal-based investments, and reduces the impact of market volatility through rupee cost averaging.


However, choosing the right mutual fund and investing in it via SIP requires a lot of research and analysis. From market volatility and risk appetite to fund performance and expenses, there are various aspects to consider. On that note, let’s review the five most important factors before investing in mutual funds via SIP.


  • Select a suitable investment tenure and amount


Choose a realistic tenure that aligns with your financial goals and time horizon. For example, if you are saving for retirement which is 20 years away, set that as your tenure. Next, assess your financial capacity and set an investment amount you can comfortably contribute. AnSIP calculator can help here.


Using an SIP calculator is easy. Input your investment goal, desired tenure, expected return rate, and frequency (such as monthly or quarterly). Once you enter these values into the calculator, it will display the monthly SIP amount needed to reach your goal. This way, you can invest within your budget, free up funds for other responsibilities, and focus on more important goals.


  • Identify your risk appetite


There are different types of mutual funds, such as equity funds, debt funds, hybrid funds, solution-oriented schemes, and more. Assess your risk tolerance before selecting a fund for your SIP and how much market volatility you can accept in exchange for returns.


For example, if you have a high-risk appetite and seek long-term growth, prioritise equity-oriented funds. If you have a low-risk appetite and prioritise capital preservation, opt for debt-oriented funds as they invest in fixed-income securities and offer relatively stable returns. In case you prefer a combination of equity and debt, hybrid mutual funds can be a suitable choice, as they provide a balanced portfolio with exposure to both asset classes.


  • Analyse the fees and charges


Mutual fund investments incur various fees and charges to cover their operating costs. These charges reduce your returns over time, thus, it’s important to choose a scheme with a low-cost structure. When a larger portion of your investment stays invested, it is reflected in your long-term returns.


Besides costs, make sure to consider additional factors like the fund’s historical performance, risk profile, and fund manager’s expertise.


  • Fund performance


Consider the fund’s returns over 1 year, 3 years, 5 years, and 10 years. Now compare these returns with other mutual funds in the same category. This will help you evaluate the consistency of an SIP mutual fund and its ability to deliver returns over different market cycles.


Look for funds that have shown steady growth and outperformed their benchmarks consistently over the long term. It indicates the fund’s ability to weather market fluctuations and generate satisfactory gains for its investors.


  • Read scheme-related documents


Mutual fund documents like Key Information Memorandum (KIM), Scheme Information Document (SID), and Statement of Additional Information (SAI) provide useful information about the scheme being offered by the provider.


In these documents, you can find critical information that will help your investment decisions, such as scheme suitability, riskometer to assess risk level, objective, asset allocation pattern, strategy, and fund management team details.


The bottom line


SIP investments work on discipline and consistency. Once you have chosen the appropriate mutual fund scheme for your SIP, commit to a regular investment schedule. Consistently investing at fixed intervals, irrespective of market conditions, helps to average your purchase cost and reduce the impact of market volatility on your portfolio.


Moreover, review your SIP investments periodically to keep them aligned with your changing financial goals. Stay informed about the performance of your selected SIP mutual funds and make adjustments if necessary.