How to choose mutual funds?
4 months ago
In today’s modern world mutual fund has emerged as a great investment option for investors. Mutual funds have their own mechanism, types, advantages, and disadvantages. Since mutual funds offer a number of mutual fund schemes to invest in. It becomes confusing for investors on how to choose and in which scheme to invest.
In this article, we are going to talk about various factors that you need to consider while choosing mutual funds that ultimately impact your decision of investing in mutual funds.
Know your goals
Knowing your goal is the first and foremost thing to do before choosing mutual funds and making an investment. A specific financial goal is need to be defined for investing. Defining goals is a kind of process itself. It involves number of activities such as assessing the time period you have to achieve your goal, amount you will need to achieve that goal etc. After knowing about your goals you can choose you mutual fund accordingly.
Understand your risk profile
It is one of the most important things to consider while choosing mutual funds. Mutual funds may involve various types of risk such as market risk, interest risk, credit risk, etc. You need to understand the difference between three things -the risk you are willing to take, your capacity to take risk,s and what amount of risk is required to take to achieve a certain level of return. After taking into consideration your risk profile and the risk involved in the mutual fund type that you are choosing, you can take your investment decision.
The expense ratio should also be taken into consideration while choosing mutual funds that are charged by each mutual fund scheme. You can choose either a direct fund or a regular fund. Direct funds involve fewer charges in comparison to regular funds. Make sure, that the return from your investment is not just utilized in paying the expense. There is a negative relationship between return in hand and expense charged by the schemes.
Know about the Fund Manager of Scheme
In mutual fund investment, you get an advantage of expert management of your portfolio. Since the major investing decisions are taken by the fund manager, it becomes important to check the track record of the fund manager of the scheme. The fund managed by the fund manager, his experience, his past performance, etc. should be taken into consideration before investing and choosing a mutual fund scheme.
Exit load and taxation
To earn a better return you need to consider the exit load and taxation that is associated with a mutual fund. Exit load is charged when an investor redeems their funds. You should try to choose mutual funds that attract less exit load and taxation to earn better returns.
Consistency of returns
Consistency of return is an important factor that you need to consider while choosing mutual funds. A mutual fund may provide higher returns in one year and nothing on the other which can affect your long-term wealth creation. You need to choose those funds which have a record of consistent returns in past.
Which type of fund?
Investors often get confused with the number of options or types of mutual funds that are available to invest in. Each mutual fund schemes have their own advantages and disadvantages. Don’t get confused, you just need to invest according to your goal and risk profile.
For example, if you have enough time and risk capacity to achieve the goal, you can opt for equity mutual funds. If you need regular income and goals need to be achieved in a short period you can opt for debt mutual funds.
AMC (Asset Management Company)
Asset Management Company or AMC is a company or firm that invests the money which is pooled from investors in different types of securities. AMC takes major decisions regarding the management and investment of the pooled money that affects the overall performance of the fund. So it becomes important for investors to know about the AMC while choosing a mutual fund investment that is going to manage the fund.
Consider the risk associated with mutual funds
Although there is a number of advantages there are many types of risks that are involved in mutual funds that you need to consider while investing in mutual funds such as credit risk, Market risk, Interest rate risk, liquidity risk etc. for example –you may need money in near future so you need to consider the liquidity risk of the funds and avoid funds which involve longer lock-in period.
Take advice from mutual fund advisor
If you are still not confident about which funds you should choose or which funds are right for you? Or you don’t have that much time to do all these things. You can take advice from your financial advisor or mutual fund Distributor and can start investing in mutual funds.
In the end, it can be concluded that choosing mutual funds is an important decision because it will ultimately help you to achieve your financial goals. Choosing mutual funds may lead to confusion among investors. To avoid this kind of confusion you need to consider your financial goals, risk profile, and other factors that are discussed above.