The Association of Mutual Funds in India (AMFI) has recently released data indicating that there are over 1.50 crore SIP folios, contributing an approximate Rs.4300 crore to the markets every month. Backed by consistent monthly additions of 6.50 lakh accounts, this trend serves as proof of retail investors’ participation in the equity market. At this point, it is of utmost importance to maximize returns and benefit from mutual funds through SIPs, for which here is a 6 point framework to understand key benefits and risks associated with it.

A mutual fund SIP is best set up to invest in equity funds. It’s important to have a time frame of 8-10 years, so the equity market’s fluctuations will even out. Discipline is essential when using a SIP, and that can be encouraged by tying it into a long term goal like retirement, education for children, or their weddings. Achieving such objectives will provide clarity on the SIP’s expected outcomes.

When designing your SIP, risk parameters should be taken into consideration. For instance, if you are looking to clear a home loan in 3 years, equities shouldn’t be relied upon as the tenure is too short. Instead, a liquid fund or a liquid plus fund would be better options. Additionally, within equity funds, sectoral and thematic funds have more risks than diversified ones; thus, it is necessary that such funds form only a small portion of your portfolio and that you look to stop the SIP if valuations go too high.

In order to start an equity mutual fund SIP, a clear framework is essential. Two key parameters that should be taken into account are the pedigree and AUM of the fund. These provide assurance that the funds are stable. Additionally, it is important to look at the consistency of the fund management team and their track record for returns. The team should not have frequent changes, while over time they should outperform Total Returns Index (TRI). While occasional underperformance is understandable, consistent below-index performance is unacceptable.

When investing in mutual funds through SIPs, you can choose between regular plans and direct plans. Direct plans do not include entry or trail loads which cause their NAV to be higher than regular plans. Through regular plans, you can gain the advantage of a financial advisor to assist in making the right fund choice. If you believe that you have the capacity to choose your own funds, then a direct plan is for you. Such a plan offers more returning due to its lower expense ratio when compared to the typical regular plan.

The question is whether you should adjust your SIP amount based on market conditions? The answer is a resounding no. Nobody can accurately predict tops and bottoms, thus increasing your allocation during a downward swing could cost you greatly. Not to mention the minimal, if any, benefit of trying to time the market over a longer period, hardly justifying the extra effort. Equity SIP focuses on time rather than timing — so why change the script unnecessarily?

Benchmarking means you invest in a SIP in order to get the benefits of active fund management. If you’re only interested in earning index returns, you should invest in an index fund that has a lower risk level. In order to be justified, your equity SIP must outperform the index fund SIP by a reasonable margin. Do not compare index absolute returns with index fund SIPs, since that will provide a much clearer picture.