Mutual fund investors often choose a SIP plan randomly. They will choose the one suggested by a friend, colleague, or their bank agent. Mutual funds can be very diverse, so what might suit your friend’s portfolio may not work for you.
Some others choose plans that are highly rated on review sites and financial agencies. Others choose to follow the top performers of a given year. No matter what the choice mechanism, most mutual fund investors wind up with plans they don’t trust.
What is the Rule of Thumb to Pick Mutual Fund Plans?
Experts in mutual funds believe that retail investors need to follow certain rules in order to get the best systemic investment plan.
These are the top four rules to help you choose the right SIP for your risk profile.
Rule No.1 – Play Safe
According to mutual fund advisors, novices and beginners should stick with the same type of scheme for each category. For beginners, it is a good idea to have one small cap, one medium cap, and one large capital. This will ensure that your investments are well-diversified and lowers risk.
You don’t have to invest in three mutual funds schemes. Instead, you can choose one mid cap and one small-cap scheme. This will give you all the stocks you need in that category.
Rule No.2 – Diversify
You’d have heard the expression, “Don’t put all your eggs into one basket.” Mutual fund investments are no different. “Never choose more than two funds from one category.”
If you choose too many schemes in a single category, you decrease diversification and increase your chance of losing all.
Rule No.3 – Stay Away From Sector Funds Now
Sector funds are not recommended for those who are new to mutual fund investing and don’t know how it works. Sector funds can be complicated and require a lot of experience in order to correctly time the exit and entry of funds. This will ensure that you get the best returns. Even experienced investors have difficulty timing the market.
Sector funds are not a good option for retail investors who are just starting out. If you are keen to invest in particular sectors, ensure that the investment amount does not exceed 5% of your total investments.
Rule No.4 – Know your Risk Capacity
Remember to pick funds that suit your risk profile. Many mutual fund investors fall for the best-performing funds. They overlook the risks. They simply add the fund to their portfolio because it is performing well.
This is a serious mistake. You should not choose small-cap or mid-cap funds if you aren’t a conservative investor. If you are too conservative, you might prefer debt funds with minimal returns.
Choose a fund that suits your risk tolerance.
