5 Not-So-Smart Ways of Selecting Best Mutual Funds for SIP

Ask any investor who has recently started investing in mutual funds about how to pick the best funds and he is sure to provide you with a number of different techniques. Or just search for ways to pick best funds on the internet and you’ll find thousands of posts on the topic. However, not everything that you hear and read with regards to selecting the right mutual fund is accurate.

Selecting a mutual fund is something that you should be able to do yourself without relying on anyone’s tips or recommendations. The financial objective, investment capital, and risk appetite of every investor is different. Thus, it is better to avoid recommendations and select a fund for SIP that best suits you and your needs.

No matter how you approach the selection process, make sure that you surely avoid these five strategies  when selecting Best Mutual Funds for SIP.

1. Selecting a fund on the basis of its NAV

"Cheaper is better", is not always true with regards to mutual funds. There are several investors, especially new ones who believe that a fund with a low NAV is better. It is the returns that a fund can generate that should be taken into consideration and not their NAV. It is not that a fund with a NAV of Rs. 50 would perform better than a fund whose NAV is Rs. 500.

2. Too much Focus on the Past Performance

While the previous performance of a fund is an important consideration when selecting a mutual fund scheme, it should not be the only decision-driving factor. The past performance of a fund is in no way a method to predict its future performance. There have been several cases when an equity mutual fund gave 15% returns in a year only to deliver around 7%-8% in the next year. 

3. Not Checking the Long-term Performance

The returns from different classes of assets can significantly vary during different cycles of the economy. Some sectors or stocks can deliver better returns over a particular period. But things can drastically change on a long-term basis. So, rather than only going through the past 1-2 months performance report of a fund, ensure that you also check its long-term performance over a timeframe of 3-10 years.

4. Not Considering your Risk Appetite

Your risk appetite also plays a significant role when selecting a mutual fund for SIP. All the different types of mutual fund schemes carry different levels of risk. For instance, small-cap equity fund is way riskier than a short-term debt fund. Just like the risk, even the returns potential vary significantly. When selecting a fund, make sure that you understand your risk appetite and returns you expect.

5. Not Checking the Total Expense Ratio

All the distribution and fund management related expenses are paid by the investors in the form of the expense ratio of the scheme. This means that if the expense ratio is high, the returns would be lower. While SEBI has capped the expense ratio of the funds, it is still better to prefer a fund with lower expense ratio unless you are very sure of the performance of the fund.

While there are many smart ways that can indeed help you pick the best fund for SIP, the ones mentioned above can surely be avoided.