Things to Consider before Investing in Mutual Funds
Every once in a while, an average Indian adult cannot help wondering how to spend your money wisely. All kinds of data flood into our social media feeds. We are fed too much information but not enough of relevance. In the middle of all this confusion, some important things might easily slip away from your mind while you are planning to invest.For example, what are the factors to consider before investing in Mutual Funds? What are the things to do before investing in mutual funds? Let us streamline it for you.
Just like an investor has financial goals, every mutual fund has its own objectives. There are different types of mutual funds that cater to the appetites of different kinds of investors. Not all mutual funds are the same. Different types of mutual funds have different goals. Study the goals of the mutual fund you are interested in thoroughly, and do not leave anything out. Compare its objectives with your own goals. If you are convinced about all the aspects of a mutual fund, go ahead and invest.
2. Risk Tolerance
Similarly, different types of mutual funds are known for different styles of investing and different levels of risk. As one has personal financial goals, risk tolerance is also personal. It differs from person to person. Knowing how much risk you can withstand is the second step in becoming a good investor after understanding your goals. Risk and returns are directly proportional. Hence, our ability to endure risk has to be equal to your desired returns.
3. The Fund Manager
The past performance of the fund as well as that of the Asset Management Company (AMC) is a key aspect to be scrutinized. The fund and the fund manager together becomes an integer. It is important to look at the qualification and experience of a fund manager as it is important to track the performance of the fund.
Always look for stability in the fund management team as fund managers too may change companies. Inspect whether the performance has remained consistent. If it has not fluctuated dramatically even through volatile markets, it attests to the expertise of the manager and the management team.
4. Expense Ratio and Other Loads
The fund houses or asset management companies levy a fee for managing your funds on your behalf. In most companies, expense ratio ranges from 0-1.5%. The expense ratio will be deducted from your returns. So higher the expense ratio, the less the returns.
Fund houses may charge other fees also. It is important to understand possible charges before investing so you will not be caught unawares. For an investor to sell existing shares, a certain fee has to be paid which is known as the exit load. Be careful to choose a mutual fund where it is as easy and profitable to sell as it is to invest.
5. Time Horizon
People invest according to their priorities. Different people have different priorities and different capacities. One of the crucial factors to consider before investing in mutual funds is the preferred duration of your investment, which is the longest period of time you can stay invested. Time horizon is the duration for which an investor remains invested. This varies from days to years. Choosing a time horizon should be based on several factors such as the investor’s goals, age and risk appetite.
If you desire quick returns, it will be wiser to go for mutual funds with lower time horizon such as a short-term investments. The advantage of mutual funds with longer duration over those of short duration is that the losses get balanced out in the longer run.
6. Go direct
There is a misconception among investors that it is riskier or even foolish to invest directly in mutual funds. Not only is this not true but it also hides a truth about the huge amount an investor spends as commission.Since Securities and Exchange Board of India (SEBI) issued a mandate introducing direct investment option, an investor has an alternative to invest directly in the mutual fund of their choice without the help of an agent or a broker. This was done to do away with the tradition of paying a commission to a third party to invest in mutual funds. With the help of a Systematic Investment Plan (SIP), it is easy to set up automatic monthly payment. SIP amount will be deducted from your account and invested in the mutual fund of your choice. To get an estimate of your SIP amount, go to a SIP Calculator .
When you invest directly, you can earn more by saving commissions. Also, you can be directly involved with your investment, beginning to end.