What should be the Right Mutual Fund for My SIP Plan?

Author: Nishant Swaroop (Financial Advisor, Academic Writer)

Hi Investors, here is another piece of information from your personal financial advisor Investment Babu. I will pick up the topic right from where I left in the previous article. I hope you guys must’ve understood the basics of SIP by now. In this article, I will talk about the right mutual fund for your SIP plan. I’ll explain everything in detail.

In addition to that, some investors also asked about How to Manage Your Mutual Fund? I’ll come to that point as well. Please go through the complete article.

Most banks/financial institutions offer SIP plans for a variety of mutual funds but equity mutual funds are the ones that are best suited for SIP plans. This is due to the volatility (high rate of fluctuation) of the equity mutual funds. Such volatility presents opportunities in front of Fund Managers to make the most out of even from the small SIP investments such as Rs. 1,000 or Rs. 2000 per month.

Now, when we talk about the Right Equity Mutual Fund, investors should understand that there is no such thing as the Best Mutual Fund. Each institution offers mutual funds that are specific to the financial needs of a wide variety of investors. There is a high probability that two mutual funds might not offer the same returns to different investors. Thus, the need for the fund, the amount of investment, tenure (duration), and risk factor play a vital role in the fund’s performance.

Important Factors While Choosing a Mutual Fund:

New Investors must pay a close attention to this part as it will help them in their decision-making process.

· What are Your Needs?

A common term in this scenario is the Investment Objective. This refers to both the objective of the investor and the mutual fund itself. This is because every mutual fund is designed to accomplish specific financial goals within a fixed tenure (duration of the fund). Here, investors need to precisely understand their goals and choose a fund that is tailor-made for their needs.

For instance, investors should not expect a steady performance from an equity fund in a shorter tenure of 3 months to 1 year. Instead, they can achieve way better returns from the same fund if they stay invested in a long-term horizon.

· Tenure/Time Horizon of the Fund:

In simple words, this is the duration for which an investor wishes to hold the fund/keep investing through SIP. The tenure of a fund ranges from as low as 1 day to up to 5 years. Not every fund works the same within the same time horizon. Here is a general idea about how different funds offer a satisfactory performance with regard to their respective time horizons.

Liquid Funds — 1 day to 3 Months

Ultra-Short Duration Funds — 3 Months to 1 Year

Short-Duration Funds — 1 Year to 3 Years

Hybrid/Balanced Funds — 3 Years to 5 Years

Equity Funds — More Than 5 Years

· Risk Factor: You must’ve heard investors saying that they had a loss in mutual funds. There can be many reasons for such a scenario but the primary ones are lack of understanding about the fund, high market volatility and high risk associated to the fund. Yes, it is true that capable, qualified and highly experienced fund managers take care of your hard earned money but the risk associated to market investments cannot be ignored as well. Mutual fund institutions clearly state the risk factors as per the type of fund. So, do not make the mistake of considering market investments as risk-free. You need to carefully study the fund and assess your risk tolerance capacity accordingly.

The decision of entering or exiting from a mutual fund is yours. Therefore, before doing any of that, take out some time, read the financial news, and talk carefully to the representative/mutual fund agent of your preferred financial institution on such topics.

· Fund Performance: This is another aspect where new investors get stuck and make wrong decisions. The parameter to judge a fund’s performance is not how much returns someone else has got over the years. The true evaluation of a fund’s performance can only be done through solid data that has been collected over the years. Such data includes Benchmark Performances, NAV (Net Asset Value), and comparison to the same fuds in the category from other Fund Houses.

You can find such data on a number of popular financial assistance providing websites. In addition, make sure that the data you study should be from the year in which the fund was issued. Therefore, you can assess the steadiness of a fund’s performance. And do not forget to study the risk exposure of the fund so that you know the fund’s performance in tough economic situations as well.

· Expense Ratio: The expense ratio of a mutual fund comprises of the brokerage fees and other additional cots charged by the fund house. This is an important factor as it will directly affect your overall returns. However, a higher or lower expense ratio does not reflect the performance of a mutual fund. It is better to go with the ones that offer a moderate expense ratio as most reputed fund houses do not charge high amounts from the investors.

· Entry and Exit Load: These are the charges that come under the overall expense ratio of a mutual fund. Entry load is a fee that is charged at the time of starting the investment and exit load is charged when an investor decides to quit the fund. Both of these are one-time charges. Most fund houses in India do not charge entry load for their mutual fund schemes but they do charge an exit load which is usually a small percentage of the NAV (Net Asset Value). Make sure to discuss the terms and conditions of exit load in advance so that you can have a clear estimate of the returns.

### Investor Question: The answer for the question ‘How to Manage Your Mutual Fund?’ as follows. There are two ways one can invest in a mutual fund. One is a Direct Plan and the other is Indirect Plan.

· Indirect Plans: Indirect plans are known as Regular plans in which the Authorised Fund Managers take look after the fund. They are the ones responsible for buying and selling securities/units on behalf of the investors. This is the best plan for new/part-time investors who cannot afford to spare a big chunk of their time to their investment activities.

· Direct Plans: On the other hand, we have Direct Plans in which investors actively manage their funds and handle everything from buying/selling units to withdrawing funds. These plans are suitable for experienced investors who possess a significant level of market understanding.

Well guys, that is all for this article. I’ll cover the different types of mutual funds in the next piece of information so that I can help you follow a systematic investment approach. Till then, Stay Happy, Stay Invested!!

Disclaimer: This is an original content, property of Investment Babu, written and published by Nishant Swaroop. Any use/copy of the content will violate the Fair Use Policy. In any case, an Individual/Company/Enterprise wishes to use the content, appropriate Permissions/Credit must be sought beforehand.

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