SIPs: 5 Factors to Consider Before You Start

“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioural discipline that are likely to get you where you want to go.”

Remember this quote from economist Benjamin Graham before beginning your investment journey through mutual funds. Never invest in mutual funds blindly because it will result in major losses. Instead, the best way to invest in mutual funds is through a
SIP or systematic investment plan. Through this mode, you can invest in the mutual fund regularly every month. However, that does not mean you should sign up for a SIP blindly. Here are some of the factors you need to look up:

  1. Investment objective:

Allocating funds to mutual funds for saving tax is a common blunder that people commit. But it is important to note that mutual funds can do more than save tax. By formulating a sound investment strategy, a SIP investment can help in achieving your short and long-term financial goals. Hence, prepare a concrete financial plan before you opt to invest in SIP. You should know your risk tolerance and the duration of your investment, i.e., for the long or short-term.

  1. SIP contribution:

When you sign up for a systematic investment plan, you could begin your investment journey with a low amount. However, with every salary hike, it is better to increase the amount of investment. This feature of SIP is referred to as top-up. You can achieve your financial goals quickly by increasing your investment over time. However, while using the top-up feature, make sure that your investments should stay in line with the rising inflation. It is also prudent to check if you could increase your fund allocation to the existing SIP instead of initiating a new one. Whatever the case, use the online SIP calculator for determining the monthly SIP  contribution.

  1. Fund performance:

Apart from the investment objective and the monthly investment, you should also look up and analyse the mutual fund’s performance since its inception. Compare the mutual fund performance with the peer funds and benchmark index. To choose a mutual fund, it should have consistently performed well for a considerable time. You could use the internet to check the performance of a mutual fund of your choice.

  1. Expense Ratio:

The expense ratio is the charge levied on you by the asset management company (AMC) or the fund house for running your mutual fund portfolio. A high expense ratio can drag the performance of your mutual fund portfolio over time. Hence, you should always be aware of the expense ratio. Please remember that funds with a lower expense ratio are better because, in the future, even a small difference may seem too high.

  1. The AMC’s credibility:

Lastly is imperative and prudent to check the reputation of the fund house. To check the asset management company’s credibility, you should look at the assets managed by the fund house, the fund manager, and its assets under management (AUM). AUM is the market value of all the financial assets managed by AMC.

Apart from the five above, there are several other factors that you should look at before starting your mutual fund investment journey through SIP. Doing so will help in reaching your financial goals.


Leave a Reply