A new job, a salary hike or simply the decision to start investing often leads to the same next step: setting up an SIP. Then comes the harder part. With so many mutual fund schemes available, how does an investor decide where that monthly investment should actually go?
Searching for the best mutual fund may seem like the obvious approach. But there is no single fund that can be labelled “ideal” for every investor. A scheme that makes sense for someone investing towards a goal 15 years away may be unsuitable for someone who expects to need the money much sooner.
Choosing well, therefore, starts with the investor rather than the fund rankings.
Begin with the reason for investing
Before comparing schemes, give the money a job.
The goal could be building a retirement corpus, accumulating money for a child’s education or working towards another long-term financial milestone. Once the goal is defined, two useful pieces of information emerge: approximately how much money may be required and how long the investor has to build it.
That time horizon can influence the kind of mutual fund considered. Different schemes invest in different assets and carry different levels and types of risk. The investment choice should therefore be aligned with the goal, investment horizon and investor’s ability to take risk.
Match the fund’s risk to your own
Returns naturally attract attention, but they tell only part of the story. The risk taken to pursue those returns matters too.
SEBI’s Riskometer provides a standardised way to understand the risk associated with a mutual fund scheme. Investors can use it alongside the scheme’s investment objective and portfolio to judge whether the fund fits their own risk appetite.
This is particularly important when making an SIP investment, because an SIP is only the route through which money enters the chosen scheme. It does not make an otherwise unsuitable or high-risk fund suitable for an investor.
Look beyond the latest return
It is easy to open a performance table and gravitate towards whichever fund happens to be at the top. The problem is that rankings can change.
Past performance can provide useful information about how a scheme has performed across different periods, but it cannot tell investors what the fund will earn next. AMFI also cautions that historical performance is for reference and does not guarantee future results.
Instead of focusing on one exceptional year, investors can examine a fund’s longer-term record and how it has behaved through different market conditions. Where relevant, performance can also be considered against the scheme’s stated benchmark and other funds in the same category.
The aim is not to find yesterday’s winner, but to understand what an investor is signing up for.
Understand what the fund actually owns
Two schemes can carry similar labels and still have portfolios that look quite different.
Before investing, it helps to examine the fund’s investment objective, asset allocation and portfolio. A concentrated portfolio, for instance, can behave differently from one spread across a wider range of securities. Similarly, funds investing in different market segments or asset classes will respond differently to changing market conditions.
Scheme documents and factsheets, such as those available on the Nippon India Mutual Fund website can help investors understand where their money is likely to be invested rather than choosing purely on the basis of a fund name or recent return.
Pay attention to costs
Costs may appear small as percentages, but they are still paid out of the scheme’s assets and affect an investor’s returns.
The expense ratio reflects the recurring expenses charged to a mutual fund scheme. When comparing similar schemes, it is therefore worth looking at costs alongside factors such as investment strategy, risk and performance rather than viewing any one measure in isolation.
Investors should also understand whether they are choosing a direct or regular plan and check applicable exit loads before investing.
Choose an SIP amount you can sustain
Once the scheme has been selected, the focus shifts to the SIP itself.
SIP is defined as a methodology that allows a fixed amount to be invested periodically in a mutual fund scheme. Regular investing can help bring discipline to the process and reduce the need to repeatedly decide when to invest.
But an ambitious SIP that repeatedly strains the monthly budget may be harder to maintain. The amount should make sense within the investor’s income, expenses and financial commitments. As income and goals change, the SIP amount can also be reviewed and adjusted where appropriate.
Review without constantly reacting
Choosing a fund does not mean forgetting about it forever. At the same time, every short-term market movement need not trigger a change.
Periodic reviews can help determine whether the scheme continues to match the investor’s goal and risk profile and whether there have been meaningful changes to its strategy or other relevant characteristics.
Ultimately, choosing the ideal mutual fund for an SIP is less about discovering one universally superior scheme and more about finding an appropriate fit. A clear goal, suitable risk level, sensible assessment of performance and costs, and an affordable SIP can provide a stronger foundation than simply following whichever fund is currently making headlines.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.
Note to the reader: This article has been produced on behalf of the brand by HT Brand Studio and does not have journalistic/editorial involvement of Mint.