What to look for before investing in Mutual Funds?

12 Nov 2020  Read 366 Views

Suppose, an individual wish to purchase a car, but before purchasing it, it is important for that individual to evaluate all the features and clear any queries related to that car. The questions can vary from, "What are the new features? How is the performance? Does it come with a safety guarantee? How much tax would one need to pay? Are there any hidden charges?"

It is quite normal for these types of questions to arise, and they can usually be cleared out by looking at the past performance and reviews of the car company or by talking to people who have already bought this car. 

The individual will purchase the car only after looking at and considering all the parameters of the car, keeping in mind their individual goals.

The same thing can happen while investing in mutual funds. Investors need to look at many things before investing in mutual funds.

In recent times, Mutual funds have emerged as one of the most preferred investments in India. If an individual has prior knowledge of the industry and chooses the right funds to invest in, a mutual fund can give very healthy returns on it.

Choosing the right fund to invest in that fulfils all financial goals of the individual might be difficult as a mutual fund offers a large number of schemes to its investors. It is a decision that should be taken with a lot of evaluation and consideration. 

Investing in a mutual fund just because your friend advised you to should not be the only driver for any investment. Instead of following tips blindly, investors should look at the different types of factors, benefits, pros and cons, and evaluate all kinds of fund options before making a decision.

So, what should you consider and look for before deciding to invest in a mutual fund?

Things to look at before investing in Mutual Funds

Looking at the benefits offered by different types of mutual fund options might help investors to make the right choice of the fund. Here are some major things to look for before investing:

Existence of the Company

Before investing in a mutual fund, investors should check the company's existence to analyze the past performance of the company. Companies that have been in existence for a decent time period might not be that risky to invest in as investors can track the company's past performance before making an investment. 

Investing in a new fund house might be risky as there is not enough data on the company's past performance.

Background Check of the Fund Manager

The fund manager decides where the investor's funds will be invested at, so it is advisable to check over the fund manager's past history and expertise in the field before making the investment decision.

To invest under the expertise and guidance of an experienced fund manager would facilitate healthier returns on investment.

Selecting the right Mutual Fund Scheme according to personal preferences

After reviewing and analyzing the company's past and a background check of the fund manager, investors should look into those schemes that fulfil their financial goals, risk tolerance, and match investor's investment styles. 

Any investors should invest in a mutual fund scheme, depending on their personal financial situation, goals, risk tolerance and expectations from the investment.

Evaluate the AUM (Asset Under Management)

The fund with a large asset value encourages investors to invest in the fund as they see that many investors have already invested in the fund. 

However, having a large number of investors and a large asset fund will not affect the investor's future returns.

Investment Allocation

Before investing the money in a mutual fund scheme, investors should check where their money is being invested. The fund manager will only invest the investor's money according to the financial goals and risk tolerance of the investors.

History of Funds Performance 

The past performance of a mutual fund helps investors to evaluate the performance of the fund, but it does not necessarily give the same results in the future. 

Investors should look at the consistency of the returns and invest in long-term mutual funds to gain higher returns on their investments and to avoid short-term market fluctuations.

Entry and Exit Load of the Fund

The entry load is charged by a mutual fund company when an investor makes investments in the mutual funds. The exit load is a charge when investors wish to sell their funds within the same mutual fund company. The exit and entry load is deducted from the NAV(Net Asset Value) of the investment. 

Investors should invest in those mutual fund schemes that charge a lower entry and exit fee to their investors. 

Expense Ratio

The expense ratio is a fee that is charged by the AMC(Asset Management Company) to manage the investor's portfolio and offer them the expected returns. This fee lies between 0.5-2% of the investor's investments.

Investors should look into the expense ratio of the fund in which they wish to invest and invest in those funds that charge a lower expense ratio.

Risk

Risk is uncertain in life, and so is in mutual funds. Investors should analyze the fund risks before investing in them. That is why they should stay invested for a longer period because short term market fluctuations can be neglected and do not very much affect the investors' returns.

Returns 

Investors should look at the consistency of the fund before investing in a mutual fund scheme. A mutual fund offers various schemes that can give higher returns, but higher returns come up with higher risk. 

Mutual fund schemes offer various schemes according to different financial goals and risk tolerance of the investors.

Taxation

Before investing in mutual funds, investors should evaluate whether the scheme is tax-free or not and if it is not tax-free, how much tax will be charged on the scheme.

Investors should be aware of these tax policies before investing blindly.

Final Thoughts 

Making investments blindly might be risky for investors if they do not have any prior knowledge of the industry. That is why experts suggest that investors should research and analyze the past and present performance of the mutual fund they want to invest in.

If investors look into things like returns, risks, tax, fund performance, etc. before investing in a mutual fund scheme, it might help them to select the right fund for themselves that can fulfil their financial goals and risk tolerance.

Investments in mutual fund schemes always depend on the goals of the investors, and they will invest in those schemes that fulfil their goals. Hence, to select the right schemes, investors should evaluate many things to avoid unnecessary risks and hidden charges.

Only after a thorough pre-investment analysis, can investors say, "Mutual Fund Sahi Hai!

About the Author: Divyanshu kumar | 29 Post(s)

Divyanshu is currently pursuing a Master's degree in Financial economics. Growing up, he has always been interested in codes and numbers which he has gradually learnt to express in words too.

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