Most of your clients will know about the significance of Systematic Investment Plans popularly known as SIPs as a tool to create wealth. However, many of them are not aware of the fact that SIPs are not a channel of investment but a method. Through SIPs, money is invested at systematic intervals in various equity or mutual funds. In this case, helping them pick the right SIP plan is essential. Advisors must keep these factors in mind:
1. Select the correct class
Financial experts have to first determine the client’s requirements, goals and accordingly choose a fund. There are different types of funds such as small-cap, mid-cap, large-cap etc. The multi-cap category allows investing across firms of all sizes and therefore it can make the most of market opportunities. If your client has a high risk appetite, you can recommend small-cap or mid-cap funds. Tax-saving mutual funds such as ELSS are perfect for clients who want to save tax.
2. Evaluate the long-term gains
Generally, clients only look at the latest returns when they consider any plan. As their financial advisor, you have to prevent them from making this mistake. Funds might register higher gains on account of sudden push in the markets which perform in the short term then fail in due course. Therefore, always check historical earnings such as 5 years, 10 years before deciding on a SIP fund. Moreover, it is vital to understand how the fund has performed in a volatile market. Capability to sustain any kind of hurdle is a necessary feature in any fund.
3. Verify if the fund has been stable
If the fund is being handled by the same manager since many years, it indicates a positive sign mainly because the fund manager has gone through several market cycles and understands how to direct the fund during unsteady periods.