5 Things to consider while investing in mutual funds
Investing in mutual funds is a step towards financial security. But if you do it without any analysis, it can be devastating as well. So what’s the right approach that one should follow? There are various aspects that you should consider while investing in mutual funds. Detailed knowledge is necessary if you want to witness massive gains. Of course, you cannot predict everything as the mutual fund returns are influenced by market performance. But still, you can assume a defensive stance to avoid any major blunders.
Identifying Goals and Risk Tolerance
Mutual fund investments are not just for saving purposes. You can plan your investments to fulfill your goals. If you start early, you can accumulate massive wealth in due course of time. For example, if you have a short-term goal of buying your dream car in five years, you can start investing so that you can accomplish the goal in five years. Similarly, you can plan your children’s education or marriage by investing for a long term.
For young investors, it is recommended to invest in mutual funds that offer high returns at high risks. This is because you have time on your side. You can build your wealth again if there are losses. However, if you do a proper analysis, the risks are drastically minimized. Further, long-term investments are generally devoid of major risks.
While assessing risks and returns, you have to consider various types of mutual funds. The majority of the funds comprise of stocks, bonds, and money market instruments. Equity funds invest the majority of the amount in stocks while debt funds invest the majority of the amount in bonds. The former gives you higher returns in the long term while the latter ensures security and decent returns. Moreover, you can consider investing in equity-linked saving schemes for tax exemption up to Rs 1.5 lakhs.
When we talk about performance, we incorporate two parameters – fund performance and fund manager performance. You can analyze the authority of a mutual fund on the basis of its past performance. Analyze returns for the 3-5 years. If there is too much fluctuation, you must consider another fund. And if it shows a consistent and gradual growth, you should definitely go with this fund. You can also compare mutual fundsaccording to CRISIL ratings.
A fund manager with a prior experience and a good track record can steer a mutual fund towards higher returns. Verify the past records of the fund manager and the performance of funds under his or her management.
Expenses & Fees
There are two kinds of expenses associated with mutual funds – entry/exit load and expense ratio. The entry load is levied when you transact for the first time. In most of the cases, the entry load is 0%. However, in some cases, it can go up to 2.5%. Similarly, exit load is charged when you withdraw the amount from the mutual fund. Some AMCs charge it and some prefer not charging exit load.
The expense ratio is the percentage of the amount deducted by the AMC for managing the fund, communication charges, fees, and so on. The maximum limit of expense ratio can be 2.5% and for debt funds, it can be 2.25%.
Assets under Management (AUM)
The assets under management parameter furnish information pertaining to the trust of the investors in the mutual fund and the fund diversification. Some of the funds have very less AUM and some of them have excessive AUM. As per our recommendation, you should select a fund that satisfies the category average. You should neither opt for a big fund nor a small one. The bigger funds are over-diversified and the small ones are too focused.