A Definitive Guide on How to Choose the Best SIP Plans as a Beginner

Published On January 22, 2019 | By Enrique Blackburn | Finance

Investment through Systematic Investment Plans (SIPs) in mutual funds has gained popularity in the last few years and is attracting a lot of new and younger investors.

SIPs help you achieve multiple objectives such as wealth creation, tax savings, and achieving financial goals. But, with over 5,500 mutual fund schemes spread across different mutual fund categories, its very tough for a new investor to select the right mutual fund for their SIPs as even experienced investors get confused with regards to this sometimes.

And, finding the right mutual fund is an art because every person is different and has a unique investment style and goals. This is why finding the right mutual fund for your SIP is not the easiest task. In this article, we will guide you on how to best select the right mutual fund schemes.

Investment Objective

The time period of an SIP investment generally ranges between 5 to 10 years, which helps it to beat volatility and create wealth with a little amount that is invested regularly and in a disciplined fashion. And, people investing in SIPs should have an investment objective such as retirement plan, child education, purchasing a house etc. 

Selecting a Fund

You should select the fund category Based on the investment objective, risk profile, and investment horizon. For instance, you should select an equity scheme only if you have long term goals, an investment horizon of 5-10 years, and have a high-risk appetite.

On the basis of risk appetite, an investor should invest in the following category:

  • An aggressive investor should invest in midcap & smallcap schemes and sectoral funds if you have a good knowledge of the sector
  • An investor with moderate risk appetite should invest in only large caps, balanced funds, and multi-cap schemes.
  • A conservative investor should invest only in large-cap funds and equity-oriented balanced funds.

All the open-ended funds have two option, namely growth and dividend option. In the dividend option, the fund house pays the dividend as and when it id due. In the growth option, the dividends are re-invested, which is why it has higher NAV. In the dividend option, the dividends are subject to dividend distribution tax whereas, in the growth option, it escapes the taxation factor which results in higher returns compared to the dividend option.

Direct or Regular Plan?

Now comes the most important question; which fund variant you should choose. In direct plans, the fund house directly sells it to the investor through the online and offline mode. In the regular plan, it is sold by distributors and agents whose commissions are added to the expense ratio of the fund. 

Since direct plan mutual funds are sold directly to the investor, the expense ratio is lower compared to a regular plan which results in higher returns. If you are well aware of all the investment scenarios, then you can invest in a direct plan, but, a new and inexperienced investor should always go for a regular plan.

Compute Your SIP Amount

A SIP investment can be as small as Rs, 500 a month, but, here you have to compute your SIP amount according to your financial goals using an online SIP calculator, which is available for free with every mutual fund house.

For example: For a corpus amount of Rs. 1 crore in 20 years, your ideal SIP amount should be Rs. 10,000 a month considering the scheme generates a return of 12 per cent.

Know Your Fund House and Fund Manager

Whichever fund you are investing in, you should check the performance of the fund house compared to its peers. It’s a very important step, as you will be depending on the investment judgement of the fund house to achieve your financial goals. It is important to know how it invests your money in the market and what was the past performance of the fund manager.

Research the fund manager and his/her investment style. If the fund manager has expertise in different fund categories, then it’s an added advantage as it will help him/her design a winning portfolio that is efficient enough to meet your goals.

Fund Performance

The main yardstick for comparing the performance of the fund is its return over a period of a minimum of five years. 

Other important points to check in the equity mutual fund scheme before investing are:

  • Alpha: It measures the fund’s performance on a risk-adjusted basis. An alpha of 1 indicates outperformance and -1 indicates underperformance.
  • Beta: It measures the volatility in the fund compared to the market movements. A beta of 1 indicates that it will move according to the market, and a beta of less than 1 indicates the fund is less volatile than the market. And, a beta of more than 1 indicates the fund is highly volatile.
  • Standard Deviation: It measures the volatility in the fund’s return in relation to the average.
  • Sharpe Ratio: It measures the risk-adjusted performance of the fund. This ratio tells the investor whether the performance in fund due to a good investment decision or because of excess risk.

For Debt Funds

  • Modified Duration: It measures the change in the value of security in response to a change in the interest rate. If the modified duration is 2.67, the price of the fund would move inversely by 2.67 per cent.


SIPs are a great tool for wealth creation but it needs a greater degree of financial discipline and patience from the investor because the whole tenure of the investment is spread over a very long period. And, also a periodical review of the funds are necessary to check whether it is still aligned with your investment plan or not.

This definite guide on how to choose the best SIP plans intends to make you aware and to help you make your first SIP investment worry free. Click here to know more about the best SIP Plans to make your learning curve steeper.


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