Mutual funds can be a desirable vehicle of investment. This is because mutual fund investors get to ride on the success of companies without having to analyze the stock or time the market.
A Systematic Investment Plan (SIP) is a mutual fund investment vehicle that allows you to invest small amounts as regular instalments rather than a lump sum at one go. So, how does one decide on the right mutual fund to make a SIP investment? To answer this question, you must consider a variety of factors, including your financial profile. Any choice of mutual fund investment is made based on the following three factors:
- Financial goal
- Investment horizon
- Risk profile
Identifying your financial objectives can be the starting point of your investment journey. The goals can be short-, mid- or long-term. Let’s look into some common examples of goals:
( 1 – 3 Years)
(5 – 10 years)
(Beyond 10 years)
The next step would be to introspect on the timeframe of your goals. Based on this step, you can decide between debt mutual funds, equity mutual funds or a combination of both – hybrid funds.
For short-term goals, debt funds can be a good choice. For targets that call for a duration longer than short, you can opt for equity funds. However, equities carry risk and are volatile than debt funds, but are known to perform better than other forms of investment in the long run.
Risk profile or risk appetite can vary from investor to investor based on the age and stage of their life, along with other determinants.
An investor can be conservative and be willing to take minimum risks. Investors in this category regard the safety of their capital as the top priority.
The next level of risk tolerance is where an investor can tolerate a moderate amount of risk in return for relatively higher potential yields. There can also be investors who are willing to accept a significant amount of risk to maximize potential gains in the long run.
Market capitalization of mutual funds
Depending on your risk tolerance and investment horizon, you can choose SIP mutual fund investments based on different kinds of market capitalization (market cap).
There are three market caps – large, mid and small. Large-cap funds provide stable and modest returns. Mid-caps are riskier and can offer potentially high returns. Small caps are the ones with possibly the maximum profits, but simultaneously subject to an equal amount of loss.
Conclusion: Which is the best SIP mutual fund investment for you?
As discussed, the right mutual fund investment is subject to one’s specific circumstances. If you are in your late twenties and want to consider 30 years as a retirement goal, you could choose equity funds. Given a high-risk appetite at a young age, and a long-term goal, you can afford to ride the market volatility. Given the time horizon, you could glean good returns in the long run through a SIP investment.