For anyone who knows what a mutual fund is, they also know about the market risks these investment tools are subject to. While mutual fund investments come with a certain degree of risk, they may not necessarily lead to losses. If you choose the right mutual funds investment plan you could profit from it and even surpass your capital investment. This brings us to an important question – how do we choose a mutual fund from so many types of mutual funds available?
This article lists factors you may want to consider before deciding to invest in mutual funds so as to make an informed decision.
- Consistent performance
One common mistake beginner investors tend to make is to invest in a mutual fund based on its recent performance in the last 6 months or a year. While this can be a straightforward approach, it may not give you ideal results. The key is to look at the consistency of a mutual fund and how it has been performing over the years across different market phases.
Since mutual funds are market-linked, their performance can vary based on changes in underlying asset classes, mainly equity funds and debt funds. It can be an excellent idea to invest in a mutual fund scheme based on your risk tolerance levels. Equity mutual funds are more exposed to market volatility as compared to debt funds. It is advisable to compare equity funds v/s debt funds in terms of risk and build a portfolio which best serves your investment objectives.
- Expense ratio
Fund houses charge an expense ratio between 0.50 and 1.5 per cent to run a mutual fund. This includes paying for portfolio management, office leases, electricity, analysts’ salaries, and so on. These seemingly small percentages can make a huge difference in growing your wealth. So, you may want to look for mutual fund schemes that have the lowest possible expense ratio.
Besides expense ratio, also consider the exit load of a mutual fund scheme. Fund managers charge this fee when you exit a scheme or the company within a specified time frame. The idea of an exit load is to discourage investors from exiting the mutual fund scheme and stay invested for the long term. A substantial exit load fee could eat into your returns, especially if your financial goals and time horizon are not in tune with your investments.
- Fund house and management
Lastly, it is crucial to consider the pedigree of the fund house. One way to go about it is to evaluate the fund manager’s profile, track record, market strategies they follow and their investment styles. Try to look for a fund manager whose investment philosophy matches with your own. In addition, you can visit the website of the fund house to know more about the fund manager’s qualification and experience, operational efficiency and quality of services rendered by them.
To sum up, investing requires time and commitment. By staying alert and focusing on all the points mentioned above,, you can reap good yields through mutual funds.