Mutual funds offer a plethora of funds under different categories suited for goals ranging from short, medium to long term goals with varying degrees of risk. The overwhelming choice of funds and options can make new investors susceptible to making errors while choosing funds for their goals. Deciding which mutual funds are ideal for you can be best done with the help of a financial advisor. Once the funds are chosen, you to decide whether you wish to invest lumpsum or through Systematic Investment Plan (SIP).
What are SIPs?
SIP is a convenient method to invest in mutual funds where contributions are auto deducted from your bank account with any manual intervention. This makes investing hassle free, consistent, and builds a saving discipline automatically.
What Beginners Should Know Before Starting a SIP
Just like you choose your destination before booking tickets, you have to zero down on your investment goals (dream home, car, education, retirement, etc.) before starting an SIP. A SIP investment plan is just a tool to invest in mutual funds. The performance of your portfolio depends on the underlying funds chosen, whether they are equity, debt, hybrid, and so on.
Do the math
Once your goals are determined, you have to assess your own risk profile and time duration you have at your disposal to work towards your goals. For instance, if you need 30 lakhs for making a down payment for buying a house 5 years from now, you will need to invest approximately Rs 42,000 per month to accumulate 30 lakhs in 5 years, assuming 7% return on your portfolio.1 https://www.mutualfundssahihai.com/en/calculators/goal-sip-calculator/
An important aspect while assuming returns on calculators is assessing your risk profile. If you have a stable income, fewer financial responsibilities and a longer investment horizon you may be comfortable taking higher risks. Risk has two aspects. Risk capacity determines how much you are willing to risk/comfortable with volatility/losing your capital. Risk tolerance is a psychological, qualitative measure of what you are comfortable losing. You may have a higher risk capacity but lower risk tolerance, which means while financially you won’t be impacted much if you incur a loss but emotionally are not able to handle losses. This shows you have lower risk tolerance but higher risk capacity.
Understanding risk tolerance helps if you are starting your mutual fund investments to avoid impulsive decisions during market volatility which is an unavoidable part of equity investing.
Role of volatility
If you are just starting in equities, daily market fluctuations can be unsettling. This is where the advantage of SIP is built in. SIPs are designed to average out your unit price/NAV price, especially when markets dip. On the other hand, when markets rise you get less units. At the end of your investment tenure, the higher units acquired during market dips may help you get higher portfolio value, if fund performance sustains. Finally, SIPs in equities reward patience. Equity SIPs may require an investment horizon of five, seven or even ten years to help you get meaningful returns, if your goals are long term.
Which SIP Plans Are Ideal for Beginners
SIP is a feature to invest in any fund. For beginners, it is recommended to start with funds that have diversified investment mandate. Fund categories like Flexi Cap, Large Caps, Balanced Advantage Funds, Multi Cap, Multi Asset Funds, may be apt for goals which are at least five years away. These funds ensure that you get diversification across market capitalisation: large, mid, small caps and across different sectors. If the investment horizon is shorter and you have a low risk appetite, conservative hybrid funds or debt oriented funds may be ideal.
How to Decide the Right Fund for your SIP
While you can also utilise a SIP calculator to get an estimate of ROI basis the past performance of the fund, it may or may not sustain in future. That said, it is worthwhile to look at how funds have performed when markets fall and when markets rise. Is the fund protecting the fall when markets crash and is the fund able to capture the upside well during a bull market? These filters can be assessed with Downside Capture and Upside Capture Ratios. This is more pertinent filter for equity funds.
Information Ratio
Another important ratio to measure a fund’s performance vis-à-vis benchmark is the Information Ratio (IR). This measures a mutual fund manager’s ability to generate excess returns relative to a benchmark, adjusted for risk (tracking error).
How to interpret Information Ratio
· Published by AMFI, a higher IR (typically > 0.5) indicates superior, consistent performance, showing the manager adds value beyond mere market movements.
· A negative IR suggests that the fund manager has not been able to generate excess returns as compared to the benchmark.
· Looking at one filter in insolation may not the right approach to select the right funds. Instead, you can look at a combination of all factors to decide which funds are apt.
Style Diversification
It is advisable to diversify across investment style (value, growth, momentum), market cap (large, mid and small caps) and geographically (emerging markets and developed economies), and asset classes like debt, gold, silver, REITs, so that your portfolio is relatively immune to shocks emanating from any one single asset class.
Other qualitative filters include fund manager’s tenure at the fund house, qualifications, fund house pedigree, investment philosophy and style, etc.
Common Mistakes Beginners Make While Choosing a SIP
As a beginner, the overwhelming information can be daunting and market movements can make you susceptible to make errors.
Focus on goals
A common mistake is to invest without having a goal. This can make it difficult to evaluate progress or stay committed. If you expect quick returns, it can nudge you to withdraw when the markets are down, potentially missing out on gains when market picks up. It is important to stay invested as per your pre-decided investment horizon that were set to meet your original goals. Of course, if the fund’s in your portfolio are consistently falling behind benchmark and peers over a longer horizon like one year or more, your advisor can help you reshuffle your portfolio and make course correction wherever necessary.
Continue SIPs
Another frequent error is stopping SIP contributions when markets fall, even though downturns are actually beneficial for long-term SIP investors.
Beware of overdiversification
If you invest in too many mutual funds at once, mistakenly assuming that diversification increases with quantity, when in reality it can lead to confusion and portfolio overlap.
Asset classes
Diversification can only help if the assets are low or negatively co-related with each other. In simple terms, debt provides cushion when equity markets fall down. Gold has historically low co-relation with equities (they may move in the same direction in some circumstances) but it is considered safe haven during economic uncertainty.
Many beginners also mistake SIPs for guaranteed return plans, not realizing that mutual fund returns are subject to market risks.
Summing up
SIPs offer one of the most practical and accessible pathways for beginners to start investing. By enabling disciplined, systematic and long-term participation in the market, SIPs help you build wealth steadily without having to track the markets constantly. The key to success lies in understanding your personal financial goals, choosing the right fund types, avoiding emotional decisions and maintaining patience throughout market cycles. For beginners, starting with simple, stable options and gradually increasing investments as your income increases can set the foundation for long-term financial security. It is best to consult a trusted financial advisor who can help zero down on your goals and recommend fund’s that are apt as per your risk profile and investment horizon.
Past performance may or may not be sustained in future and is not a guarantee of any future returns.
Please note that these calculators are for illustrations only and do not represent actual returns.
Mutual Funds do not have a fixed rate of return and it is not possible to predict the rate of return.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.