An insight on how to choose the best SIP plan for you

Mutual fund systematic investment plans have become one of the popular saving and investment choices for large number of retail investors in India. Through SIP you can invest a fixed amount of money out of regular your regular savings at certain intervals (monthly, quarterly etc). SIPs offer a simple and disciplined way to accumulate wealth over the long term. Mutual Fund SIPs work like bank recurring deposits, except that mutual funds are subject to market risks, but can generate superior post tax returns compared to recurring deposits. SIPs in good funds have generated excellent returns and created wealth for the investors over a long investment horizon. Mutual fund SIP can be the ideal way to meet long term or medium term financial goals.

Let us now discuss how to choose the best SIP investment plan for you –

The first and a very important step in the journey to your financial goals, is to clearly define your goals. We usually have multiple goals in life e.g. buying a house, children’s education, children’s marriage, financial independence in retirement etc. The timelines for these goals are different. It is not enough to say I need have so many lakhs or Crores by the age of 50; all goals in life are important. You need to clearly define, how much you need for each goal. You should always factor inflation when defining your goals; otherwise, you will be woefully short of your goals. It is unwise to apply average inflation rates for all goals. Certain items in our consumption basket like education, healthcare etc have much higher inflation rates and you need to plan accordingly.

The next step to choose the best SIP investment plan in a structured financial planning process is to determine your risk capacity. Risk capacity depends on multiple factors. The timeline to your goal is an important consideration; if you have a long timeline then you can take more risks and vice versa. Stage of life also determines our risk capacity; risk capacity of an investor diminishes with age. Finally, the risk capacity of an investor also depends on their personal financial situation e.g. assets, liabilities, income sources, number of dependents etc.

Accordingly, investors should select mutual fund schemes that are suited to their investment needs and risk capacity. Mutual funds offer a wide variety of product types with different risk / return characteristics. Funds which have higher risk can give superior returns in the long term, but can be volatile in the short term; you should choose mutual fund schemes very carefully.

For example, if an investor has a very long investment horizon (e.g. 10 years or longer) and high risk capacity, then for him/ her best SIP investment plan could be midcap equity mutual funds. If investors have long investment horizon, but do not have very high appetite for volatility large cap and diversified equity (multi-cap funds) are more suitable as best SIP investment plan. For investors with moderate or moderately aggressive risk profiles, equity oriented balanced funds are good choices. Investors who are in advanced stages of retirement planning (e.g. 5 years or less away from their retirements), equity savings funds or hybrid debt oriented mutual funds (e.g. monthly income plans) can be suitable options to protect their savings from equity market downside risks.

The final step of choosing the best SIP investment plan is the fund selection. There are thousands of mutual fund schemes in the market and selecting the right fund can seem like a daunting task. However, if you follow the steps discussed above, your task will become much simpler. As discussed earlier, your investment should depend on the financial goal and risky capacity. Once you narrow down to the fund category, your fund selection task becomes much simpler, but even within each fund category there can 20 to 50 schemes if not more.

You should select schemes for the best SIP investment plan based on long term track record of the fund managers. You should first eliminate the below average performers, funds in the bottom two quartiles, in terms of long term (3 to 5 year) performance.  Next you should look at funds which have the best long term track record and also fund manager continuity. Even if you select a fund which has good long term track record as well as fund manager continuity, there is no guarantee that the fund manager will continue managing the fund throughout the tenure of your investment. That is why AMC track record of fund management should also be a factor in fund selection. AMCs which have good long term track record and organizational depth should be able to replace a departing fund manager with another good fund manager.

In this post, we discussed how you can select the best SIP investment plan for your medium to long term goals. Choosing the best SIP plan for you is not easy because future performance is not predictive, but if you follow a methodical approach as discussed above, your job becomes easier. It is also important to note that, even if you selected the best SIP investment plan using a methodical approach, you should continue to monitor your portfolio performance at least once in a year and take corrective actions, if a fund is underperforming versus its peers for a fairly long time.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

An insight on how to choose the best SIP plan for you
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