How to Choose the Best SIP Investment

Over the past decade, the popularity of mutual fund investment has grown by leaps and bounds. The two modes of investment for mutual funds are lump sum investment and systematic investment plan (SIP) mode. Experts opine that SIP is the better choice for long-term wealth creation. There is no dearth of mutual funds available today, so how do investors make a choice? Here is a guide on how to choose the best mutual funds for SIP investment.

Define the long-term goals for the SIP


Depending on the investor’s goal and investment horizon, they can choose between equity, debt, or liquid funds. Liquid or debt funds are suitable for shorter investment horizons. The most popular choice for SIP investment is equity funds, as it helps generate the best returns but requires longer investment horizons. The first step, therefore, is to define the goal for the SIP and the investment horizon. If it is something that is 7 years away and is meant to generate wealth then an equity investment would perhaps, be the best choice. Investors can choose to have a single SIP investment dedicated to a single goal, or a single SIP dedicated to multiple goals. They can also choose to have multiple SIP investments for a single goal. Whatever it may be, it is important to tie the SIP investment to a long-term goal as it encourages discipline.

Choosing the SIP amount using a SIP calculator

Once investors have determined their long-term goals, they have to figure out how much money they need to achieve them. They can use an SIP calculator to understand how much they should invest to achieve that amount.

The SIP calculator will ask for certain details such as the goal amount, investment horizon or tenure, investment strategy, and expected returns. Once the investor has determined the required SIP amount, they should stick to it regardless of market fluctuations. SIP investments do well with consistent, long-term investment; it takes advantage of rupee cost averaging. Here trying to time the market is not the way to success.

Consider the risk appetite

Once the investment goal and horizon are determined, investors must consider their risk appetite. While equity investments are considered the best mutual funds for SIP investment, not everyone is open to equity’s volatility. In this case, they can either choose s debt or liquid fund investments that have lower risk or choose an equity fund that is low risk or moderately-low risk on the Mutual Fund Riskometer. High-risk mutual funds are associated with the best returns but will be more susceptible to market volatility.

Choose high-quality funds

Investors often choose mutual funds by looking at their recent performance. However, this is not a fool-proof method as high-performing funds can lose value during times of market correction. Here are some other factors investors should check:

  1. Fund’s relative performance and risk attribute: The fund’s performance should be compared with other funds within the same category as well as the benchmarks during different market phases. The risk-return attributes of the mutual fund scheme should be evaluated. Metrics such as the Information Ratio and Sharpe Ratio, which are risk-adjusted measures should be checked as they indicate how well the fund is performing compared to its peers and the benchmarks.
  2. Fund manager: Investors should check the fund managers’ track record to assess the different schemes they managed across asset management companies and market phases. This will help glean the manager’s expertise and skill in portfolio management.

Associated costs

A fund’s associated costs such as its expense ratio and exit load should be considered by investors. Lower expense ratios are preferred as they result in higher profits. Moreover, the fund’s exit load can also eat away at the investor’s share of the profit.

Investment process

A good mutual fund scheme will have a strong process-driven investment system. The best mutual funds have well-designed investment processes, which increases the chance of the fund’s success.

Age of the fund and AUM

When it comes to mutual funds, older may be better. Investors should prefer to invest in schemes that are at least three years old. This way, they can also check the historical returns of the fund, though they must keep in mind that this is no guarantee of future performance. Investors should also consider the fund’s assets under management (AUM). The AUM indicates the total value of the assets managed by the mutual fund; different types of mutual funds behave differently with regard to assets under management. For some, higher assets under management may be an advantage, while for others, it may be less of an advantage.

The bottom line

SIP investments are a great way to plan and save for future goals. They help inculcate discipline and avoid impulsive decisions in investments. Investors should consider all parameters of the fund as well as their own requirements before settling on a fund.

About The Author

Scroll to Top