Mutual fund investments are increasing in popularity among the public at large. They are widely appealing due to their ease of investing, low initial investment, tax savings, and expert management.
Choosing the correct mutual fund may appear simple, but it is impossible to do it without following a few basic principles. In this article, we will go over some of the characteristics that must be considered while choosing a mutual fund & they are –
1. Investment Objective of Investor – Investing professionals advise investors to select funds that meet their investment objectives. Diversifying one’s fund allocation is also recommended to help investors limit losses when the market does not match their investing goals. And hence, before investing in any fund, you must first determine your investment objectives so as to match your objective to the fund’s objective.
2. Identifying your financial goals – You must first choose a financial goal before scouring the mutual fund world for the best plan for yourself. Financial goals are goals that require finances to achieve the target. Examples of those goals can be – Funds required for Child’s Education, Marriage, a foreign trip, buying a new car or house or etc. After you’ve established a financial goal, you can begin investing in a fund that matches your needs. But how can an investor decide the amount that needs to be invested? Through a Return Calculator! Yes, A Return Calculator helps you to calculate the approximate amount (i.e., the future value) that an investor may receive in the future. Once done, an investor can invest a lump sum amount (i.e., one-time investment) or through the SIP (Systematic Investment Plan) Mode in a Mutual Fund.
3. Understanding Risk & Reward – Because risk and reward are directly proportional, you must strike a balance between your desire for returns and your willingness to tolerate risk. Furthermore, a potential investor must select how long he or she will keep a fund. For Instance, if you are young & planning to buy a house in 10 years & require higher returns, you can choose an investment product that has higher returns like equities! But also meets the risk & reward criteria for you.
4. The goal and manner of investment – Every mutual fund, without exception, has an objective that it strives to achieve. This objective can assist investors in determining whether or not investing in that scheme will help them reach their investment goals. You can invest in large-cap, mid-cap, small-cap, multi-cap, Flexi-cap, or other funds based on your risk tolerance.
5. Investing approach – As an investor, you must also think about the fund’s investing strategy. Most investors overlook this factor, although it is critical to your investment portfolio’s success. It determines a fund house’s strategy for making investing decisions and selecting stocks for a scheme. A conflict of interest may emerge if the fund house’s investing strategy differs from your investment goals.
6. The performance of the fund – It’s possible to tell if a fund manager has a good track record as a stock picker by looking at how the fund performed against its benchmark in the past. Investors should look at the portfolios of the funds that the fund manager manages and how often she churns them. This can provide a solid indication of the fund manager’s ability to stock pick and manage funds.
7. Fund Manager’s Experience – This is important in terms of earning profits. When investing in a mutual fund, a wise investor should research the fund manager’s track record. , the experience and tenure of the fund managers have a major effect on the fund’s efficiency.
8. Expense Ratio of the Fund – The cost of investing in an equity fund is represented by this metric. The higher the expense ratio, the more it will affect the fund’s profitability. It includes brokerage fees and other expenses charged by fund houses to investors.
9. Analysis of ratios and performance – By calculating average returns, Sharpe and Treynor ratios, and Standard Deviation, one can compare a fund’s risk and performance. They can assess the fund’s risk exposure as well as the alpha generated in relation to risk and average return.
10. Entry & Exit Load of the Fund – The cost components that directly affect an investment are entry and exit loads. The entry load is the fee charged by a fund to an investor when he/she makes their first investment in the fund. The exit load is a fee charged by the fund house whenever an investor exits a fund. It is a percentage of the NAV you receive, leaving a hole in the value of your investment.
As an investor, you must look for mutual fund schemes with no or minimal entry and exit loads. However, it only applies if the units are sold ahead of schedule. The exit load is automatically eliminated when you invest for the long term. For instance, you redeem 100 units of a mutual fund scheme after 5 months of your purchase date. Assume the NAV for the same is ₹10. 1 percent X 100 (units) X 10 (NAV) = 100 will be the exit load. This sum will be deducted from the withdrawal proceeds, with the remainder going to your savings account.
Lastly, the mutual fund you choose is vital to the overall results of your investment portfolio and the achievement of your financial objectives. It may appear to be a difficult undertaking, but with a little research and awareness of your goals, it can be made easy. With so many options available, it’s easy to become perplexed and end up in a difficult situation.
To add in, having a user-friendly platform like RURASH makes it easy to invest and track your money. Also, if you keep all of the pertinent variables in mind, you should be able to select the greatest fund scheme to invest in.
RURASH is one of India’s investment management firms, providing financial solutions to augment the client’s wealth and facilitate building a legacy.