5 Important Factors to Weigh Before You Start an SIP

May 14, 2022

Listen to 5 Important Factors to Weigh Before You Start an SIP

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Mutual funds are one of the most popular investing options available to both novice and seasoned investors. You can invest in mutual funds either through a systematic investment plan (SIP), which requires the investor to invest at regular periods, or through a lump sum (one-time) investment.

Give that, the current environment which is characterised by inflationary pressures and recent geopolitical tensions between Russia and Ukraine, has made markets extremely volatile. Many investors are having trouble with their investments, and many are concerned about the impact on portfolio returns.

What is the right strategy for investing in mutual funds when markets are volatile?

Well, a time-tested investment strategy that works well in the long term is Systematic Investment Plan (SIP).

What is a Systematic Investment Plan (SIP)?

SIP or systematic investment plan is one of the best ways of investing in mutual funds. Investors can set aside a pre-determined sum for a determined period, on a fixed day of the month in a scheme. An SIP allows you to invest little amounts at regular periods, such as weekly or monthly and units are allotted for the amount invested in each instalment.

Investing in mutual funds via SIP mode removes the potential mistake one may commit, by timing the market. Besides, it ensures you stay on the right track for your long-term financial goals. Unlike a lump sum investment, you spread your investment over time with an SIP.

Therefore, you don't need to have a large amount of money to get started with your mutual fund investment through SIPs.

5 Important Factors To Weigh Before You Start An SIP
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How Do SIPs Work?

When you invest in a mutual fund scheme through a SIP, you buy a specific number of fund units equal to your investment amount. The biggest advantage of SIP is that one need not time the market. Rather than trying to time the market, investing every month will ensure that you are invested at both the high and low points of the market, allowing you to make the most of an opportunity that may be difficult to forecast in advance.

Since NAV of all mutual funds are updated on a daily basis, the cost of purchase may vary from one SIP instalment to another. Over time, the cost of purchase averages out and turns out to be on the lower side. This is known as rupee cost averaging. This benefit is not available when you invest a lump sum.

Investing in mutual funds through SIP is a simple and disciplined way of accumulating wealth over a long period of time. Mutual funds entail two types of earnings - dividend and capital gains. If, instead of withdrawing your earnings, you choose to reinvest it in the same plan, you can reap the benefits of compounding. When you activate an SIP, a fixed amount is deducted from your bank account every month, which gets invested in the mutual fund of your choice and this helps you instil a sense of financial discipline in the long run.

While opening a mutual fund account and investing via SIP is seamless and convenient given that online platforms today help even first-time investors complete the registration process within just a few minutes and in a completely paperless manner, it's important to know the factors you need to address before starting an SIP.


Before choosing a mutual fund SIP scheme, investors should consider the following aspects:

1. Identify your goals

Determine why you want to start the SIP. The type of scheme, term, frequency, and quantity of SIP can all be set once the goal has been identified. You may have several goals in mind, like as saving for a vacation, paying for your child's education, or preparing for retirement. Having separate SIPs for every goal can help you gauge your investment smartly.

Next, identify the goal for which you want to start the SIP. Besides goal, also figure out how much time you have to attain that goal, in other words how much can your corpus grow and compound. Find the appropriate asset allocation that is suitable for a particular goal and look at investing in the correct category of mutual funds in line with your timeline.

Making a smaller monthly commitment, rather than a large one-time investment, reduces the financial strain on your wallet.

2. Assess your risk profile

Why is this risk-return trade-off so important? Mutual fund schemes can be differentiated into low, medium or high risk, depending on the type of securities and asset classes they invest in. When investing in a given asset class, your risk appetite or tolerance is the amount of risk you're willing to handle. As a result, you must assess your risk tolerance to ensure that your SIP investments are in schemes that match your risk tolerance.

Every investor's risk appetite is unique, and it is determined by a variety of criteria including discretionary income, investment horizon, and, most crucially, age and immediate financial or other demands. Similarly, liabilities such as expenses, debts, number of dependents etc., can also influence your risk appetite.

Understanding your risk tolerance and the type of investor you are will help you choose the correct mutual fund schemes and asset classes to invest in. You may have a larger risk appetite as a youthful investor than those in their middle or near-retirement years. A balanced fund or a diversified large-cap equity fund is a good choice for risk-averse investors.

Furthermore, mutual funds offer a plethora of schemes with different risk profiles and investing in multiple funds can help spread the risk.

3. Performance of the Mutual Fund scheme

Investors should consider the fund performance of the mutual fund scheme before investing via SIP. Assess the performance of the scheme over 1 year, 3 year, 5 year and since its inception against the benchmark, peer funds as well as the category of the fund along with the consistency of the performance.

The scheme should have performed well consistently over a period of time. Check annualized as well as rolling returns. You need to find a scheme that does the hard work for your investments Ideally, you should put your money into a diversified equities fund that has a track record of outperforming the category average and benchmark returns. When selecting the correct fund for your SIP investments, the fund manager's track record is also critical.

4. Consider credentials of the fund house

The asset management company should have a good reputation in the market, and the fund manager should have a solid track record of managing funds. Checking the fund house's credentials, such as the fund manager's expertise, assets managed by the fund house, and the scheme's AUM, are essential indications to consider. A long standing process-driven fund is likely to give consistent performance.

It is a risky investment proposition if the fund house of the scheme is a latest entrant in the mutual fund industry, as it is yet to build a reliable track record and mark its success in the market. Consider investing in mutual fund schemes managed by a well-established fund house that follows a robust investment process.


5. Expense costs

The fund's expense ratio, as well as the entry and exit loads levied at the time of redemption, are all key aspects to consider when choosing a scheme. Check the fund fact sheet, portfolio statement, and performance tracking websites.

The expense ratio of a mutual fund is crucial to investors since fund operational and management fees can have a significant influence on net profitability. The whole amount of fund fees is divided by the total value of the fund's assets to get the expense ratio.

The expense ratio of the fund, as well as the redemption loads, are also important factors to consider when selecting a plan. These are the fees associated with a mutual fund's management, promotion, administration, and distribution. The majority of expense ratios fall between 1-2%, with some falling below 1%.

Last but not the least you need to calculate your SIP investment amount. Calculate the appropriate SIP amount to achieve your financial goals through the investment. Technology has made it simple to compute your SIP amount at your fingertips.

You can simply use the SIP Calculators that are available through various fintech apps, online portal of fund house, etc. The calculation is on the basis of your financial goals, time horizon and expected rate of return. It is essential to choose an appropriate transaction date and link your SIP investment with your bank account.

Now that you are aware of the key factors to weigh before investing in a SIP, aim to select a fund suiting your risk appetite and embark on a journey of wealth creation. Reviewing your future goals and portfolio returns on a periodic basis is a great idea to maintain your financial well-being. As a result, make sure that your SIP investments are in a worthy mutual fund scheme.

PS:  If you wish to select actively managed worthy mutual fund schemes, I recommend that you subscribe to  PersonalFN's unbiased premium research service, FundSelect.

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Warm Regards,
Mitali Dhoke
Jr. Research Analyst

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