Systematic Investment Plan (SIP) is a mutual fund investment plan where an investor can invest can fixed amount in a mutual fund scheme of his / her choice at a regular frequency (weekly, fortnightly, monthly etc). To start an SIP, you have to submit a bank ECS mandate along with the application form for the scheme. Different fund houses offer a variety of choices of debit date for SIPs. Through the ECS mandate, the SIP amount (as specified by you) will automatically get debited from your bank on a particular day of the month (or any other frequency) specified by you and get invested in the mutual fund scheme of your choice. You can either opt for a perpetual SIP, which you can stop at any time by instructing the AMC, or you can specify an end date. Minimum SIP amounts are usually Rs 500 or Rs 1,000 (depending on the fund house).

You may see lot of online blogs giving you the best SIP plans for a year, but the best SIP plans for you may not the one mentioned in blogs; the best SIP is the one, which is ideally suited for your investment needs. There are four aspects of any investment objective:-

  • Investment Tenure
  • Returns Expectations
  • Risk appetite

The entire above are related. Longer the investment tenure, higher should be your risk appetite. Higher your risk appetite, higher can be your returns expectations and vice versa. The fourth aspect, capital appreciation versus income is also related to the risk profile. However, one can have income needs both in short term and long term. Ultimately, all investments work on the principle of risk versus returns relationships. Higher the risk, higher the potential returns.

Different types of mutual funds have different risk return characteristics. Equity funds have the highest risk profile, but they have the potential to give the highest returns. Within equity funds, small and midcap funds are the riskiest, but they also usually give the highest returns in the long term. Multicap funds (diversified equity funds) are next in terms of risk profile. These funds invest in both large cap and mid/small cap stocks. They tend to outperform midcap funds in bear markets (because midcap stocks are more volatile than large cap stocks), but they can underperform large cap funds in volatile markets (for the same reason). However, these funds can outperform large cap funds in bull markets. Large cap funds have lower downside risks in bear markets, but they tend to underperform midcap and multi-cap funds in bull markets.

Hybrid funds on the other hand, invest in both equity and debt. There can be different kinds of hybrid funds. Equity oriented hybrid funds (e.g. balanced funds) are more risky than debt oriented hybrid funds (e.g. monthly income plans), but they tend to outperform debt oriented hybrid funds in the long term; however, in volatile markets, debt oriented hybrid funds provide more stability than equity oriented hybrid funds. Finally, debt funds are less risky compared to equity and hybrid funds. They provide portfolio stability and income, but their long term capital appreciation potential is limited. You should select mutual fund product categories based on your investment needs and risk appetites. This step is more important than fund selection because asset allocation is more important for your investment needs than individual scheme performance.

Once you have narrowed down to the product category, you should select schemes based on the long term track of the fund manager. You should first eliminate the below average performers, funds in the bottom two quartiles, in terms of long term (3 to 5 year) performance.  Next you should look at funds which have the best long term track record and also fund manager continuity. Even if you select a fund which has good long term track record as well as fund manager continuity, there is no guarantee that the fund manager will continue managing the fund throughout the tenure of your investment. That is why AMC track record and depth should also be a factor in fund selection. AMCs which have good long term track record and organizational depth should be able to replace a departing fund manager with another good fund manager.

Therefore,to choosebest SIP plansknowing your risk appetite, investment tenure and return expectations is the most important criteria apart from remaining invested for the long term to benefit from compounding.