4 Things to Keep in Mind before Investing in Mutual Funds

Rising awareness about mutual funds have attracted many investors of different income levels, age groups and geographies to participate in capital markets. However, in mutual funds, a sizable number of the investors are new, who lack basic understanding on which mutual funds to invest in, that results in suboptimal decisions.

Checkout 4 important factors you must consider for making an informed choice:

• Arrange investments as per your crucial financial goals

Arranging investment with your goals help you to understand the amount you should invest and for what time horizon you must stay invested. Aligning investment horizons to attain your goals assists you to estimate whether you should invest in debt, equity, or hybrid mutual funds. For instance, while equities are highly volatile in the short run, they hold the potential to outperform fixed income investments as well as inflation over the long term by a huge margin. Thus, investment for a long-term financial goal must be made in equities. Debt funds, on the other hand must be considered for meeting your financial goals maturing in the short term because it comes with higher income certainty than equities.

• Assess the investment objectives and strategies of fund

All mutual funds clearly mention their objectives and investment strategies, which represents their broad fund management style and asset allocation strategy. Assessing the fund objective and investment strategy before you invest in mutual fund online helps you know if it is a right match for your goals, risk appetite and investment philosophy. You can get the fund’s objective and strategy in SID (scheme information document), KIM (key investment memorandum), product leaflets, product presentation and other product literature.

• Evaluate the fund’s past performance

You must ensure to compare your selected fund’s performance with its benchmark indices as well as peer funds over time-periods like 1,3,5,7, and 10 years. While the fund’s previous performance may not guarantee similar performance in upcoming times, comparing past performance will help you understand how the fund faced various economic conditions earlier than its peer funds and benchmark index.

• Factor in fund’s expense ratio

Expense ratio refers to per unit cost for managing the fund scheme. It is calculated by dividing the annual operating expense percentage with its average daily net assets. Operating expenditures include commissions paid to distributors, management fees, legal and audit fees, transfer and registrar fees, fund administration costs and selling and marketing costs. As such, expenses are met from the assets managed by the fund, lower expense ratio means a higher contribution would remain invested in mutual funds for compounding and future growth. You should choose mutual funds with lower expense ratio to avail higher returns. Direct plans in mutual funds may be selected, as their expense ratio is 1% less than regular plans. While outperformance in returns of direct plan might seem marginal in the starting stage, the difference will become sizable over the long run due to the power of compounding.

Conclusion

Mutual fund is a time-tested investment instrument. It leverages the time you have kept your investible amount in the instrument and reduces risk by endowing the benefit of diversification to your investment portfolio. If mutual fund investment is on your mind, ensure to follow the above consideration points to select the right fund.