How to choose the Best SIP to Invest for yourself

Investing in systematic investment plans (SIPs) can be confusing. A lot of new investors are wary of them, but even seasoned investors have trouble getting their SIP strategy right. Before we begin analyzing how to choose the best SIP, let’s first clarify what SIP actually means.

Decoding SIP

Investing in mutual funds, which invest in the markets, is the basis of a systematic investment plan, in which you invest at regular intervals (monthly, quarterly, or annually). SIPs are flexible instruments that help you build wealth and instil the habit of saving even in the most disorganized of us. Compounding is the main benefit of investing in SIPs. On a monthly basis, you earn compound interest on your deposits, which increases the amount of money you invest significantly over time.

Choosing the Right SIP

To earn high returns, it is important to choose the right fund to invest in via a SIP. When choosing which SIP to invest in, bear the following factors in mind.

Step 1: Establish long-term objectives and tag SIPs to them

The best way to plan for retirement or child’s education is to invest in equity SIP. The best way to invest in equity SIP is through equity funds. However, SIPs cannot be meaningful unless they are tied to a long-term goal. Multiple SIPs can be tied to a single goal, as well as a single SIP tied to multiple goals. As you know the purpose and hence stick to your SIP investment over the long run, you become disciplined.

Step 2: Identify products that fit your risk-return tradeoff

You can invest in equity funds, debt funds, or even liquid funds. That entirely depends on your goals, your timeline, and the criticality of the situation. Liquid funds or liquid plus funds are required if the tenure is short. Equity fund SIPs work best when the goal is long-term, such as beyond seven years. If possible, structure these long-term goal SIPs using diversified equity funds or multicap funds. Stay away from sectorial and thematic funds.

Step 3: Type of fund 

Mutual funds come in many types, so it’s important to know which type meets your risk appetite. Let’s look at some of the types of mutual funds:

1. Investing in asset-based mutual funds
   
   1. There are various types of equity funds: large cap, diversified, mid & small cap, sector, and index funds.
   2. Money Market Funds, Income Funds, and Fixed Maturity Funds are further classified based on investment tenure.
   3. Funds with a balance of equity and debt represent the best of both worlds for investors. To mitigate equity funds’ risk profile, they invest in debt instruments to ensure steady returns to investors.
2. Investing in structure-based mutual funds
   1. Open-ended – Investors are free to enter or exit these funds at any time.
   2. Closed-ended – These funds are open for investment for a limited period during the launch of the scheme. New fund offers (NFO) close once they are closed.

Step 4: Which is better – the direct plan or the regular plan?

Based on the level of advisory support you need, you should make a conscious decision. You do not pay distribution or trail fees when you enroll in direct plans. There is a 100-125 basis point reduction in the total expense ratio (TER), so there is an increase in returns. You should consider your cost-benefit analysis. There is also the option of opting for direct plans and then using an independent advisor to help you reach your goals.

Step 5: Think long-term about equity SIPs

The purpose of equity SIPs is not to reap immediate rewards. The power of compounding works in your favor with SIPs over a longer period of time. In the case of a 3-year equity SIP, you may be disappointed since the cycles may not work in your favor. Over time, rupee cost averaging becomes more beneficial for your SIP. In such an event, the cost of acquisition is reduced and the return is increased.

Step 6: Establish and stick to a fixed SIP amount

When markets correct, investors often debate whether to increase their SIPs, and when markets rise, they should reduce them. Timing the market is similar to that. It’s difficult and doesn’t bring any benefits. The whole idea behind a SIP investment is that you allow time to work in your favor and compounding to work in your favor. Do not try to time the market, but rather invest in a good SIP.

Step 7: Benchmark SIP performance against index and peers

These are two separate issues. By investing in a SIP, you can get the benefits of active fund management because index returns can be earned through an index fund. A sustained outperformance of the equity SIP over the index fund SIP must be achieved. If the manager achieves that, her job has been done well. Checking the peer group assures you that your fund manager is in line with reality.

Why you should invest in SIP

Aside from its benefits, SIPs have many other compelling reasons to be included in your investment portfolio:

• Regular Savings: Each week, every month, or every year, you can invest in a SIP. The minimum investment is Rs 500, but you must be disciplined. This is particularly convenient for salaried people, who can invest a small portion of their salary each month according to their preferences.
• Convenient and flexible: SIPs can be started in a very convenient manner, especially in the online mode. After your bank has been given permission, the amount can be automatically deducted from your account. You also have the option of changing the amount each month and terminating the scheme at any time.
• Low Risk: With mutual fund or SIP schemes, the risk is relatively lower. Markets tend to even out over a longer period of time, and the chances of good returns increase.