How to build an SIP portfolio of mutual funds?

“SIP mein invest karna hai.” or

“What do you suggest – SIP or mutual fund?” 

Too often, investors believe that a mutual fund and an SIP are two different things.

It’s a misunderstanding.

An SIP, the short form of Systematic Investment Plan is a method of investing in mutual funds. When you make a regular investment with a pre specified frequency such as ‘Rs. 1000 per month in XYZ scheme‘, you are doing an SIP.

You have set up a system in which the amount is automatically deducted from your bank account and transferred to the specified fund. With every investment you are allocated the units of the mutual fund in the account.

Investing regularly is a good habit and the SIP method makes it automatic and easier. The fact remains that you do an SIP in a mutual fund. They are not different investments, rather one is a method and one the investment option.

Read more on SIPs.

The question now is what should your SIP portfolio of mutual funds look like? 

Building an SIP portfolio of mutual funds

Let’s first look at the various reasons for which you want to invest regularly.

• Build your emergency fund corpus
• Save for your retirement
• Save for child’s education
• For a holiday or any other asset that you want to buy

The fact is that we save over time and invest that way too. As incomes grow and expenses stabilise we are able to save and invest more.

SIP method helps you to put these regular savings over time to work with mutual funds.

Once you have identified your goals and the amount you need to invest in, you select your funds based on your risk profile and time horizon.

But as everyone knows, selecting the right mutual funds is NOT an easy job. There are more than 5000 schemes out there. Which ones do you pick up for your portfolio?

Here are a few guidelines you can use to build a mutual fund portfolio via SIP .

1. Shortlist your funds on the basis of track record – It doesn’t mean only past performance nor does it mean star ratings/rankings. Study the Scheme Information Document, the factsheet and find out compelling reason to have the fund in the portfolio. Again, it cannot be only performance.
2. If you are just beginning to invest, an ELSS or tax saving fund can be a good start. You can add more funds later.
3. Don’t have a lot of funds in your portfolio. A maximum of 6 funds is good. These funds should possess unique characteristics or investment styles.
4. Allow your funds to make a difference to your portfolio. By this, we mean that you assign a minimum weightage, say 10%, to each of the funds you invest in. The investment should have enough weight to be able to move the portfolio.
5. An SIP can be done into any type of fund. You can select an equity fund, debt fund or balanced fund, depending your risk profile and time horizon. For example, you can have an SIP into a liquid fund for your goal to save for a holiday next year.
6. Choose direct plans of mutual funds – With direct plans, you can save on commissions leading to additional growth of your portfolio, as much as 1.5% in some cases. However, keep in mind that if you take an advisor’s service you might pay a fee separately.
7. Select an SIP duration you are comfortable with. You can select a long enough period –  1 year to 99 years or more. However, technology makes it possible to do short SIPs such as 1 or 2 years and then renew them basis your review and assessment. With every renewal, you may also increase the amount of the SIP.

So, get set now to start your own SIPs. You can use Unovest to invest in direct plans of mutual funds on Unovest. There is no charge for investing on your own. Pay only if you need advice.

Read more: How to build a winning mutual fund portfolio.