A Systematic Investment Plan (SIP) is a periodic mandate that is given to the mutual fund company (AMC) to deduct a fixed amount from your bank account at a fixed frequency like, daily, weekly, fortnightly or monthly as per the ECS/ Auto debit mandate and invest the amount in a mutual fund scheme chosen by you. Essentially, SIPs are one of the convenient ways of investing in equity mutual funds over a long investment horizon.

SIPs are very convenient as with a one-time mandate, you can invest from your investible surpluses at regular intervals over a period of time and can benefit from the power of compounding. You can start your SIPs with amounts as low as Rs 1,000 per month. For SIP in ELSS mutual funds the minimum amount is Rs 500. Therefore, you do not have to wait to accumulate a large amount to start investing in SIPs.

The other benefit of SIPs is that it also helps you become disciplined by controlling your spending habits by instilling a culture of regular savings. When you do not save regularly your money often gets spent on non-discretionary items. Therefore, every additional rupee of savings, if invested wisely, can accumulate huge benefits in the long term due to the power of compounding.

SIPs also make redundant the need to timing the market as stock markets are very difficult to forecast and therefore, it is extremely difficult to buy at low prices and sell at a high prices always. Through SIP you always buy at high and low points of the market and therefore, your cost gets averaged out over a period of time. This is called rupee cost averaging.

These are some of the benefits of SIPs, however, you must read the advantages of SIPs to know more.

To know which are the best mutual funds for SIPs, investors should look at funds which have a long track record of performance. One should not look at short term fund performance because the current market conditions may have a big impact on short term returns. As market conditions change, the performance of a mutual fund scheme may be impacted. Investors should look at long term performance – at least 3 to 5 years – when selecting best mutual fund schemes for SIP. Investors should see how a scheme has performed versus its benchmark over a period of 3 to 5 years. At the very minimum you should expect a mutual fund to outperform its benchmark index. Wider the margin of outperformance, higher is the alpha generated by the fund manager.

Let us see the 5 year return of mutual funds SIPs in diversified equity mutual funds

Some financial websites show investment returns over 10 or 20 years for mutual funds to prove the point how the schemes have performed over longer periods of time. While very long term performance may look good and can make for very interesting analysis, however, very long term returns like 10 year or more, are not very useful because a number of fund attributes like change in fund manager, change in investment strategy, market maturity (in a stock market like India) or the change in fund category over the years.

A more important factor for investors to choose best mutual fund for SIP is the tenure of the fund manager with the scheme. If the fund manager is continuing with the AMC/scheme for a long period then it is a very positive factor for choosing that fund for SIP. However, if a top performing scheme has a new fund manager, even though it is not necessarily negative; investors should look at the track record of the new fund manager for the schemes he or she has been managing in the past.

Since mutual fund SIPs are usually long term investments, performance consistency of the fund should also be an important consideration. Rolling returns is a useful measure to evaluate performance consistency of the scheme, but investors who are not familiar with rolling returns can break up the performance of a fund into different periods (like annual returns) and see how the scheme performance in each of these period was compared to benchmark or its peer group schemes.

Let us see how is the rolling return of top 5 diversified equity mutual funds versus the returns of the category.

Historically, there has been a gulf of difference between best performing funds and worst performing funds across various time periods. However, if you invest in a consistent performer, then you are likely to get excellent returns from your SIP in the long term and that could turn out to be your best mutual fund for SIP.

To see how much wealth you can create through mutual fund SIPs, try our Mutual Fund SIP Calculator