6 Things to Consider before Investing in Mutual Funds

Mutual Funds are a great investment medium. Expertly managed by professionals, tax benefits, diversified and above all, safer than most.

Mutual Funds offer the flexibility to invest periodically or lump sum, through a broker or directly and select the funds which suit your ‘risk’ profile. Researching the right mutual fund for you is critical for investment.

What are Mutual Funds?

Mutual Funds are like a bowl of investment soup. Thousands or even millions of investors pool their money to buy a variety of investments (primarily stocks, bonds) which are blended together and then divided amongst the participants.

Now, just like a restaurant serves a lot of different dishes, mutual funds come in a lot of different flavors.

Some funds focus on a specific sector of the economy, like technology, retail and agriculture. Some focus on the size of the companies from Large to small.  Mutual Funds shares are usually inexpensive, and you get the advantage of diversification without having to buy hundreds or thousands of shares yourself.

Now, before you invest in any mutual fund; you should consider the following factors in detail,

1. Investment Objective

Before you do any investment; there is always a target or a goal behind it like buying a house, a new car or to create wealth. Similarly, every mutual fund has its own goals and objectives regarding what it wants to deliver for its investors.

The objective of the mutual fund is explicitly mentioned in the offer document of the fund. Offer document holds complete details of the fund like where your money will be invested, risk profile etc. so whenever you select a mutual fund for investment do read the offer document.

2. Past Performance of Fund

It is imperative that you check the past performance of the fund even though it might not be a guarantee for future success but past performance shows how the fund fared in different market cycles.

You will have to at least have to check the past performance for 5 to 10 years. Every mutual fund has a benchmark and you will have to check the mutual fund returns with its benchmark so you can decipher how the mutual fund performed in the market cycles.

You should also compare the mutual fund with its peers from the same category and see how they have fared against the benchmark.

3. Fund Manager

Every mutual fund scheme has its own fund manager and it’s important that you know who the fund manager is and what his experience is. The performance of the mutual fund depends a lot on this because it is the fund manager who decides where and when to invest your money. So before you invest in any mutual fund scheme you should know the fund manager and the returns the fund has provided in his tenure as manager.

You can also check the other funds being managed by the fund manager.

4. Risk Appetite

As you know that there’s a bit of risk involved with mutual fund investing. Before you select the mutual fund you should check its risk to reward ratio i.e. if the amount of risk taken by the mutual fund matches your risk capacity or not.

5. Expense Ratio

To manage your money the Asset Management Company or AMC charges a certain amount of fees which is known as expense ratio. You can invest in mutual funds via the regular plan or direct plan.

Direct Plan – In the Direct mutual fund plan the investor directly purchases the mutual fund scheme from the AMC.

Regular Plan – With a regular plan the investor purchases the mutual fund scheme through a financial advisor or a mutual fund distributor.

6. Exit Load

Whenever you exit from a mutual fund scheme or withdraw your investment from the scheme then the mutual fund house levies an exit fee which is called as Exit load. Generally, the exit load is charged on equity schemes if you exit before 1 year.  Before entering a mutual fund scheme, you should definitely check the exit load implications.

Single Point Summaries

1. Consistency in Performance

It is better to invest in a fund that shows consistent performance over time and not just a few months.

2. Fund Performance

Past performance helps you evaluate the volatility in return and performance

3. Expense Ratio

High expense ratio leads to high cost and thus comparatively lower returns

4. Fund Manager

You must give importance to the fund manager and his team, to ensure that your money is in competent hands

5. Asset Under Management

Less AUM in any scheme is risky, as we generally do not know who the investors are.

If you follow the above steps; you can definitely achieve your investment goals and objectives with mutual fund investments.  If you are thinking about mutual funds, start investing in mutual funds through the one of the highly rated Mutual Fund App by investors on Google Play Store.

Conclusion

Mutual Funds are an amazing creation. They allow ordinary people to invest in huge institutions, thousands of holdings, and diversification while being easy to use. The vast variety of mutual funds means there are mutual funds that suit every type of investor.

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About FinanceGAB

Ajeet Sharma is a financial blogger and I am blogging since 2017. Financegab is a personal blog dedicated to personal finance. The main aim of this blog to help people to make well-informed financial decisions.
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