The Buyt Desk
Mutual funds are good investments and give good returns in the long run. But it also involves risk factors as it is market-linked. Analyze before you choose a mutual fund.
Mutual funds are the most popular investment. They focus on various asset classes ranging from equity, debt and gold. From new investors to experienced investors everyone is investing in mutual funds for better returns. But before you take the plunge into mutual funds you must do proper research and understand the way mutual fund works.
Mutual Funds are not managed by an individual but there are fund managers who manage these funds and each fund has a defined objective. The money of several investors is put together into a pool and an investment product is created in a Mutual Fund investment plan. This pooled money is used by the fund manager to purchase gold bonds, stocks and other securities. Mutual funds can be a one-time investment or periodic investment through a systematic investment plan (SIP). Nowadays, in the internet era, creating a Mutual Fund account is easy and quick. Even new investors can do the registrations online in just a few minutes. Now the question is – Which Mutual Funds suit you the best? How to select the appropriate Mutual Fund for your investment portfolio? Below are a few points that will help you in making the right decision.
Do good research and analyze the record of the Mutual Fund
You must understand the investment style of the fund manager. Fund managers follow a theme irrespective of the market cycle. Next is to study the mutual fund scheme and the AMC performance for the last few years. But performance to date will not guarantee current or future performance. Go for a mutual fund house that has a large AUM (assets under management) as it can bear sudden redemption pressure from major investors.
There are a few parameters that you should look into when you are buying a mutual fund. The important investor parameters are risk tolerance, investment knowledge, return expectation and investment horizon. Few more important parameters are expense ratio, past performance, fund manager’s experience and AUM. Look into all these factors and analyze them closely.
Distinguish your Goals
You should know why you are investing, the expected returns and the time period of investment. Once you clearly know the purpose, you can decide upon the mutual fund that will help you achieve your purpose. When you are not sure of what and when you want, you may end up choosing the wrong investment and you may not have funds when you need them. Your purpose can be higher education for your children, a dream vacation, a down payment for your dream house or even to generate a corpus for retirement. The time duration and risk will determine the type of mutual fund you should choose like equity mutual fund, debt mutual fund or hybrid mutual fund.
Analyze the risk
Here the term “risk” means an investor’s risk appetite and also the risk that every mutual fund has. Only when both align does it become a good investment. Equity mutual funds will have ups and downs in a short time frame so these have a higher degree of risk and so are the returns. The higher the risk higher is the return. While the debt mutual funds are more stable, hence lesser risk and so are the returns. Beginners may start with equity mutual funds.
Analyze the Expense Ratio
A commission will be charged for managing your investments. And this is known as the expense ratio and go for the one with a lower expense ratio. The expense ratio reduces as the AUM increases.
Consider your time horizon
You should have a time frame for your investment. You should know the number of years you can invest without disturbing your day to day expenses. Based on this you can decide the mutual fund you need to invest in. Debt funds are for medium-term and short-term financial goals. While equity funds are for long-term financial goals like retirement.
Diversify your investment portfolio
As a young investor, you can diversify with greater exposure towards equity mutual funds and shift more towards debt mutual funds when you are nearing retirement. The diversification of your portfolio depends largely on your age, investment objectives, risk profile and time horizon. It is better to invest across AMCs than in one mutual fund house. But see that the different investment styles in your portfolio should not be a struggle to manage. Avoid identical equity mutual fund schemes. Invest in mutual funds with different stock holdings. Do not overlap portfolios to increase diversification.
Pick the right investment mode
You can either invest directly through an asset management company (AMC) or through a mutual fund distributor or broker. Your expense ratio will be lesser when you invest directly as you will be saving on the commission paid to the distributor. Also through an online investment platform, you can invest in mutual funds at discounted rates. SIP (systematic investment plan) is where you invest in mutual funds regularly over a period of time rather than lump sum investment. This procedure will also save you on tracking the stock market.
Check the Taxes
Never oversee the taxes even when you are an experienced investor. In the case of equity mutual funds, the returns are taxed as per the holding period. Holding periods of 36+ months are taxed at 10% over and above 1 lakh while holding periods below 36 months are taxed at a rate of 15%.
Choose the right mutual fund. Happy investing!
