Many times, mutual fund investors just randomly pick a SIP plan. They just go with the one recommended by a friend or colleague or even their bank agent. However, mutual funds are highly diverse and what suits your friend may not match your portfolio. A few others opt for plans, which are highly rated by review websites, and other financial agencies. Others go with the star performers in a particular year. Whatever be the mechanism for choosing, a majority of mutual fund investors end up with plans that they aren’t confident about. Is there any Rule of Thumb for picking Mutual Fund Plans? Mutual fund experts believe that to land the best systematic investment plan; retail investors should follow a set of rules. Here are the four rules that help you in choosing the best SIP that suits your specific risk profile: Rule No.1: Play Safe Mutual fund advisors recommend that beginners and novices just stick with one type of scheme across each category. For instance, one small cap, one midcap, and one large cap work well for beginners. This way your investments are diversified, thereby lowering risks. If you don’t want to invest in three mutual fund schemes, then just opt for one mid and one small cap scheme as it gives you all the right stocks in that particular category. Rule No.2: Diversify, Diversify, and Diversify
You would have come across the saying, “Don’t put all your eggs in one basket.” The same holds true for mutual fund investments. “Don’t choose more than a couple of funds from a particular category.” When you opt for too many schemes from a particular category, you reduce diversification, thereby increasing your chances of losing it all, if the specific segment goes downhill or hits a slump. Rule No.3: Stay Away from Sector Funds for Now If you’re new to mutual fund investments and aren’t sure of how it all works, then it’s better that you stay away from sector funds. Sector funds are a bit complex and require experience to accurately time the entry and exit of the funds to gain maximum returns. Even seasoned investors find it difficult to time the market. Retail investors, who are just getting started, are better off by staying away from sector funds. However, if you’re keen to invest in a particular sector, make sure the investment amount is not more than 5% of all your investments. Rule No.4: Know your Risk Capacity Always remember to choose funds that fit your risk profile. Very often, mutual fund investors are tempted by top-performing funds. They don’t look at the risk levels. Instead, they add it to their portfolio just because the fund is performing well. This is a grave mistake. If you’re not a conservative investor, then choosing mid or small-cap funds suit your risk levels. On the other hand, if you’re too conservative, then debt funds that offer minimum returns work better for you. Always choose a fund that matches your risk tolerance levels.