Investment is one of the best ways to pile up your savings to make it a fortune. There are several ways to invest but they all have different risk factors. But, in general, mutual funds are considered one of the safest options because your portfolio becomes diverse and you also get the option to manage your funds via an expert. You can invest in mutual funds in two ways: lumpsum and SIP. Most of the people in India are salaried and they usually do not have the lump sum to invest at once. A preferable alternative to this would be investing via SIP. There are several SIP mutual funds that you can choose from in 2022 but it is important that you understand the right way to invest in mutual funds via SIP.
What is SIP?
SIP refers to Systematic Investment Plan. It is a mode of investment in which you make a monthly investment instead of depositing a lump sum amount. You can set a SIP amount and it will automatically keep on deducting each month from your bank account. The reason why SIP is deemed so desirable is that it factors in compounding and rupee-cost averaging.
In compounding, when you invest in a particular amount of money, the interest you earn from it keeps on adding to the principal amount. What this means is that the base amount you will have in the second year, will be the combination of the principal amount in the first year and the interest or returns accrued on it. This process goes on till the time you want to keep your investment. The result is that you get a much higher return than a standard interest scheme. When you invest in mutual funds via SIP, it too follows the methodology of compounding.
With compounding effects, you can grow your wealth at a faster rate than standard interest schemes.
Rupee-cost averaging is another feature you will find in the SIP mutual fund scheme. It adheres to the formula where if the price of the mutual fund units are high, your money will be used to purchase a few of them. Similarly, if the price is low more units can be had from your money.
Steps to Choose the Best SIP
However, there are numerous schemes out there. Which one you should choose is a highly subjective question. Hence, it is important that you keep in mind certain points that will help you make the right decision.
The Objective of Investment
The first thing you need to ask yourself before investment is the purpose of investment. What are your goals and in how much time do you want to see them come true? You also need to factor in the risk associated with the type of fund you are thinking of investing in. In simple terms, you need to make sure that you are making the right form of investment for your needs. Once you figure out the objective of your investment, you will be able to choose the mutual funds accordingly.
Diversification plays a key role in mutual funds. There are three categories of investment in mutual funds: equities, debt funds and hybrid funds. While investing, you should go for the SIP options where your money is divided across different classes of assets. Even if you are willing to invest in a scheme that is equity oriented, you should make it a point that diversification takes place in the form of large cap, medium cap, and small cap investments. Diversification of your investment portfolio will help you in minimizing risk and in getting stable returns.
By investing in different asset classes, you will be securing and stabilizing your overall investment.
Once you have got your mutual fund scheme, you need to keep monitoring the portfolio turnover that takes place with your investments. Portfolio turnover refers to the changes made in the portfolio by the fund manager. This is done by purchasing and selling the assets. If there are frequent changes in the portfolio it will increase your expenses in the form of brokerage fee, taxes, etc. Hence, go for an SIP investment scheme where your portfolio turnover is kept to the essential.
The Fund Manager
When you are putting your trust in a fund house to manage your investments, you would want them to be one of the best in what they do. Hence, it is important that you make sure to do a background check of the fund manager you are relying on. You can do so by looking at their past performance with different clients and their overall track record. It is also important to keep expense ratio in mind as well. The lower it is the less you will have to pay the fund house for the service they provide.
If you are investing in mutual funds with the hope of making money from quick returns then think again. Mutual funds are designed in such a way that they can benefit the investors in the long run with their compounding effect. And when you are investing via SIP scheme, you should keep the long-term goal in mind. For short-term investments, there are other better options such as liquid funds. So go for a SIP investment scheme, where you can target your maturity for a longer duration.
Best SIP Funds in 2022
The best SIP plans (funds) are not a static group of funds. They keep on changing from time to time. But since we are at the start of the year, we can take a look at some of the best large cap SIP mutual funds to invest in 2022.
|3 Year Compound Annual Growth Rate (CAGR)
|CAGR as of Now
|ICICI Prudential Bluechip Fund (G)
|Axis BlueChip Fund (G)
|Mirae Asset Large Cap Fund (G)
|ICICI Prudential Bluechip Fund Institutional I (G)
|Aditya Birla Sun Life Frontline Equity Fund Trigger Facility (G)
But looking at the performance of the funds should not be the sole determinant of your choosing the right SIP. Consider other factors mentioned above to come to the right decision. If you are unable to or feel you lack the knowledge for making the right investment choice, you can always take the help of a fund manager.