Mutual funds are one of the best investment options available today. As compared to other investment options such as bank deposits and equities, mutual funds offer a steady balance between returns and safety of capital. You can earn good amount of returns from mutual fund investment.
Asset Management Companies (AMCs) offer various types of mutual funds - equity funds, debt funds, balanced funds, income funds, index funds etc. with several schemes. Availability of so many mutual fund categories and schemes in the current volatile markets can put the investor in a fix of choosing the right kind of fund to suite his/her needs.
Before opting for any fund, you should always consider these basic factors:
Knowing your investment objective
Having a clear idea about your investment goal and objective is the most important thing before making any kind of investment. The investment objective can be –“growth” or “regular income”.
Once your objective is clear, you can easily decide upon which type of fund you need i.e. whether to go for growth funds or for steady and regular income funds. There are some categories of funds such as equity funds and index funds which are having the basic objective of growth. On the other hand, there are some funds which are meant for regular flow of income in the form of dividend received such as debt funds and income funds. One can accordingly opt for the same after knowing the objective.
Though the past performance is not indicative of the future performance of any fund, keeping a track record of the returns it provided over a period of time should be given due consideration. With the information about the past performance you can identify categories of the funds performing better in the past. You can opt for such category hoping it will perform well in the near future as well.
Moreover, it is also advisable that one should continuously keep a track of funds he/she has opted for. This can be easily done by maintaining a diary and having a weekly or monthly portfolio analysis.
Know your risk appetite
Knowing one’s risk appetite is a very important thing to keep in mind before selecting a fund. Risk taking capacity and rewards are correlated with each other e.g. if your risk taking capacity is high, you can opt for equity or equity linked funds; on the other hand, if your risk appetite is low, you should go for debt funds.
Know the tenure:
Tenure of the investment plays a very vital role in investment decisions. An investor should be aware of the period he/she will remain invested in a particular fund/scheme. The tenure can be short, medium or long. A person should opt for such tenure/scheme that he/she can avail easy cash from it to meet the contingencies.
The liquidity factor should be kept in mind by the prospective investor. For that the lock in period of funds should be given due thoughtfulness, like in equity linked saving schemes (ELSS) the lock in period is 3 years that is the investor cannot liquidate his investments before maturity. Similarly with fixed maturity plans (FMPs) the lock in period is 1 year. Thus, an investor should assess the liquidity aspect of the funds along with the tenure.
Nothing comes free of cost and mutual fund investment is no exception. Load structure of MFs is another important factor one needs to consider before selecting a particular scheme. The entry and exit load varies from fund house to fund house, so one should opt for the fund which suits his/her needs.
Investors should know the nature of return they will obtain from investing in a particular MF scheme and its tax implications. Usually investors get dividend and/or capital gains by investing in mutual funds. Dividend received is tax free whereas, capital gains are taxable.
A fund manager plays a key role in the success or failure of the fund as he has the final authority to buy or sell a unit. It is always prudent to check whether the fund manager has changed, as the investment strategy of the new fund manager is bound to be different from the previous fund manager. So the returns would also vary accordingly.
Read the offer document carefully
The prospectus or the offer document gives you all the details about the fund. A thorough reading of the fund’s prospectus is a must to learn about the investment strategy and the risk that you will be exposed to. “Mutual funds are subject to market risk. Please read the offer documents carefully before investing!”
A word of advice:
One should do a thorough research of the market and performance of sectors, before selecting any fund for investing your money. Also avoid investing in sector funds, without reviewing the respective sector performance. Thus a thorough research is a must on your part.
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