Mutual funds can offer higher returns than traditional ways of savings and investment such as deposits or endowment plans. Equity mutual funds are market-linked, therefore they carry risk as well. (Image courtesy: SBI)
Are you planning to invest but aren’t sure what to invest in and how to invest? With growing expenses and limited income, everyone aspires to increase their wealth. But with so many options available, it becomes difficult to pick the form of investment best suited to your expectations.
This is where mutual funds have such a big role to play. Unlike direct equities, mutual funds free you up from the hassles of having to research, buy, or sell stocks in the portfolio in order to maximise gains. When you buy a mutual fund, you leave these arduous tasks in the hands of the fund manager who brings in his investment expertise to make your money grow.
Mutual funds can offer higher returns than traditional ways of savings and investment such as deposits or endowment plans. Equity mutual funds are market-linked, therefore they carry risk as well.
It’s a challenge to find the exact fund that maximizes our wealth and minimizes risks. It’s not enough to invest in funds with the highest rankings. It’s also a folly to pick funds based on promising returns in the short-term. A star performer mutual fund if this year could be a poor performer the next.
But there’s a fund designed to meet just about every investment need, which is what makes mutual funds an irresistible investment option. For example, a retired person may prefer a debt-based mutual fund with minimum risk whereas a young investor may choose an equity-based mutual fund with more returns but higher risks as well.
How do you pick the fund that’s best for you? Here are a few things to consider when investing in mutual funds.
1. Investment Objective: A lot of investors do not ask themselves this question: why are you investing? Are you investing with a long-term goal or looking for short-term returns? Is the money going to be used for your child’s marriage or education, or is it going to support you post retirement?
2. The Risk Factor: Are you are a risk taker or do you want to play safe? If you are losing your sleep because of dramatic changes in portfolio value, it is advisable to avoid equity funds. However, if you are willing to take risks and have the ability to hold on to the investment for a longer period, equity funds are the best option.
3. Selecting Your Category: Once you have ascertained your investment goal and risk factor, it becomes easier to narrow down the list. If you are ready to take the risk and want to use the fund money in the future, you are suited for long-term capital appreciation fund. Although volatile in nature, they carry the potential of generating larger returns over time. However, if you want to use the money at a nearer time, income funds will suit your purpose better.
4. Evaluating Performance & Past Results: Just like all other investments, it is crucial to evaluate the performance and past results of a mutual fund. Funds are ranked by multiple factors, with emphasis on returns. Rankings differ from one research firm to another. The best bet is to pick up two rankings and select a mutual fund common between these two rankings. Past performances don’t guarantee future returns. However, it makes sense in reviewing the investment company’s history to anticipate trends in the future. A good mutual fund is the one that has consistently outperformed benchmarks over 3-5 years. Therefore, always look for consistency in performance over a period of 3, 5 and 10 years rather than focusing on the short-term returns. You might come across many schemes showing high returns in a year, but that have failed to deliver in the last 3 or 5 years. Such plans may not be worth your money.
5. AUM (Assets Under Management): Go for schemes with high AUM and consistent track record. Mutual funds with high AUM are believed to have maintained their stability even in a turbulent market. It is best to avoid the ones with below average AUM.
6. Check The Expense Ratio: An expense ratio has a significant impact on the returns. Different investment companies charge different expense ratio. Hence, it is advisable to check the expense ratio before investing as schemes with high expense ratio can eat away a significant portion of your returns. A high-performing mutual fund may not be affected much by a higher expense ratio but it will be negatively impacted when the fund starts performing poorly.
7. Careful With The Exit Load: It is crucial to know the exit load of a mutual fund scheme as you might be in need of money before the end of your investment horizon. For example, the exit load of a fund scheme may be 5% within two years. However, if you decide to pull out in a year’s time, an additional percentage may be deducted as exit load. Therefore, never go for schemes with stringent exit load.
8. Decide on Investment Mode: Take a decision on the investment mode, i.e. whether you want to invest in a lump-sum or choose SIP (Systematic Investment Plan). SIP is a safer option as it benefits from both falling as well as rising markets.
Remember, mutual funds are subject to market risk. Always do a proper research and study before investing. - financialexpress
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