5 Tips on How to Decide the Best SIP Mutual Funds to Invest in

Seeking answers for your mutual fund related queries? Worried if you will lose your money by investing in the wrong fund?  All your concerns can be addressed when best sip plans are chosen. Read on to know the best tips which are likely to help you decide on the best mutual fund to invest in.

1. Understand the categories of mutual funds

There are 5 different categories of mutual fund namely equity, debt, hybrid, solution-oriented and other categories of mutual funds. While the equity-based funds have a higher return and higher gains these should be chosen if wealth creation in a short time is your objective. Investment in debt mutual fund should be done when you have a mix of short to long term investment plan.

Hybrid, as the name suggests, is a mix of these two mutual funds and solution-oriented mutual funds cater to children’s education and retirement funds. The other category of mutual funds is for investors who wish to follow indices as SENSEX and NIFTY.

Selection of the Schemes

Past performances of any a mutual fund is no indication that the fund will perform better in the future too. There is no guarantee that you will get the same returns from any fund presently if it has been giving you better returns earlier.  There are a lot of good SIP plans which have performed well in the past.

Thus, the selection of schemes has to be done based on their present performance and after consultation with the fund manager. You can invest in best SIP plans according to your priorities and needs.

2. Examination of holdings of mutual fund

Mutual funds work on the simple principle that when an investor invests in a worthy company at good prices, they are likely to get good results. On the contrary investment in any poor company will often give poor returns, even if the investment has been done at a low price. This fact is applicable for both the debt and equity instruments of the mutual fund companies.

Paramount significance should be given to the quality of the portfolio when a mutual fund is selected as this would be the holdings of the mutual fund scheme. Ideally, the investor should look at the top 10 holdings of different mutual funds which means the top 10 company shares where the fund has invested in, it is but natural that if these are good companies, the holding quality would also be worthy.

3. Cost to the investors' investment

The investor should ideally look at the total expense ratio of the mutual fund scheme as also its turnover ratio. This should then be compared with a fund in a relatively similar category of mutual fund. The retail investors have a tendency that they follow big brands and big names when it comes to the selection of mutual funds. This is, however, a subjective assessment and it lacks any kind of scientific base.

The funds should, therefore, be never selected on this basis and the qualitative aspect of fund management should always be considered. The TER (total expense ratio) and the portfolio turnout ratio or the churn ratio should be a basis of selection. It should be mentioned here that TER is the cost which the investor pays as a fee for management of the fund and other related services.

The turnout ratio is an indicator of the frequency of churning of the stock which has been underlying in the portfolio of the mutual fund scheme. The higher the TER is, the more it will eat into the returns that the investor will get  and if the turnover ratio gets beyond a limit, it would mean that the fund managers are not able to choose the right kind of stock which would eventually add to the costs that the investors would have to bear.

4. Determination of the risk tolerance level

It is a common fact that mutual fund markets are volatile and have substantial risks and thus the mutual fund investments are likely to fall occasionally which is based on the condition of the market. Thus, it would be good if you research and consult with the experts as to what are the recommended SIP plans to invest in. It is, however, important to see how quickly these investments are able to bounce back as the markets stabilize so that the strength of the portfolio also shows up. The investors also need to look up to the present NAV( which is the net asset value or the price for one unit of the mutual fund in which the investment is being done). They also should compare the same with available NAVs of 52 weeks (both high and low indicators). This will help the investor in assessing the current market conditions and invest accordingly.

Every mutual fund also describes the risks associated with that particular fund and these have been categorized as low risk, moderately risky, moderately high risk and high-risk funds. The investor should think and invest accordingly.

Last but not least, the fund managers and advisors should be consulted prior to choosing the mutual fund.