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Six things to know before investing in mutual funds via SIPs

If you are a first-time investor, and don't want to spend a single minute thinking about when to invest, then SIP is the right investment option for you.

Aseem Thapliyal | December 15, 2017 | Updated 14:28 IST
Six things to know before investing in mutual funds via SIPs

SIPs are becoming popular with the rising equity market and the returns they have generated in the past. If you are a first-time investor, and don't want to spend a single minute thinking about when to invest, then SIP is the right investment option for you. Here's a look at basic things you should consider before putting your hard earned money at stake.

Existence

You should ensure that the mutual fund you are choosing has been in existence for at least five years. Parking your money in a new MF is likely to put it at risk since you will not be able to monitor its past performance for returns.

Read more: Should my portfolio worry about global uncertainty?

Companies

Every systematic investment plan (SIP) puts its money into a bunch of companies from different sectors. You can check the profile of the companies picked by the MF and see how they have performed in the past. News related to the firms, their financials and future prospects can also be considered before choosing the SIP.

Making the right choice

Are you a conservative, moderate or an aggressive investor?  The answer will help you choose the equity mutual fund scheme you can invest in.

If you have long-term goals, have investment horizon of five years or more and a high-risk appetite, then equity schemes is the best option for you.

If you are moderate investor, largecap and multicap (they are also called diversified equity) schemes are the best options for you.

If you are an aggressive investor, midcap and smallcap schemes (high returns with high risks) can help achieve your financial goal.

Also read: Not happy with returns on fixed deposits? Many are investing in mutual funds

Costs: Mutual funds charge a fee for managing your money which is called Expense ratio. It constitutes fund management fee, agent commissions, registrar fees, and selling and promoting expenses. In the long run, these small costs can have a large impact on your returns. A difference of 0.50% in recurring cost over a long period such as 10 years can matter a lot. As per SEBI regulations, the maximum expense ratio of an equity fund can be 2.5% and for a debt fund, it should not cross 2.25%.

Normally, the bigger the size of fund, the lower is its recurring cost.

You should also check the exit load, the cost which is paid by the investor when he redeems the investment before a certain period.  Exit loads vary according to different types of funds and depend upon the nature of assets held by them.

Returns

One should check returns given by a fund during different time periods and compare them with a benchmark, usually an index and other funds in the same category.  There is no guarantee that mutual funds will repeat their past performance in the future but a thorough look at the funds and their peers will give you an idea of which funds can prove to be a better bet for you compared to others.

Large corpus size

The total corpus, or asset size, of the mutual fund is large. This gives you the confidence that a large number of people have subscribed to the fund.  There are mutual funds whose corpus will be small but if you are a first time investor, you should ensure that your money gets parked in a SIP with large asset base which will inspire confidence in your future investment with the fund.

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