10 Things to Know Before Investing In Mutual Funds

Mutual funds, in spite of being exposed to the constant risks of the market, are emerging as one of the most sought-after investment vehicles in India nowadays. Most financial service companies in India deal in mutual funds.  When picked well, mutual funds are capable of doubling your wealth over time. However, picking winners can be a bit of a task, thanks to the surplus of options in the market. Moreover, mutual funds come with a lot of perceptions, opinions and prejudices and investors are capable of getting lost in the chaos.  That’s why instead of falling for tips given to you by friends and brokers you should get acquainted with a lot of things before investing in a mutual fund. Let’s have a look at the major things that you need to check.

  1. Duration of existence: How long has the fund been in existence for? This factor is important for the simple reason that investing in an extremely new fund with no track record may be riskier than a fund that has already proved its existence. Abhinav Angirish, founder of invest online.in says that the reason behind this is that there’s no history to be tracked for these funds.
  2. Due diligence about the fund manager: A check over the fun manager helps you determine whether the hands you’re giving control of your hard earned money to are trustworthy and competent or not. A fund manager who is an expert with finance with makes the perfect candidate. PL India is a great example of highly qualified fund managers.
  1. Review the scheme and investment style: A scheme that is in alignment with your end goals, as well as your risk appetite, is the one that should be selected. Thus, its imperative that the broader style of investment of the scheme is understood thoroughly.
  1. Assessment of assets under management: A large asset size points to the fact that a huge number of people have shown interest in the fund and are willing to invest in it. Although there’s no direct correlation between asset size and future performance of the fund, it can boost the sentiments of a potential investor towards the fun.
  2. Check the Investment allocation: It’s essential that one knows where his money is actually getting invested. Is it just debt or debt combined with equity. The asset class chosen should have its features in line with the investment objectives. The bifurcation should be mentioned as well
  3.  Fund’s historical performance: Learning from the past performance of a fun in imperative while doing the analysis of a mutual fund. However, you cannot completely take it for granted and must be used as one of the parameters to select a fund. Another great way is to gauge the fund’s performance in different business cycles – consistency over ranking. You’d rather be part of a fund that is consistently ranking at the 7th or 8th place as opposed to one that and that’s ranks 1 in one period and 40 in another.
  4. Entry and Exit load: Entry load refers to the charge levied on you when you join a fun. Exit load is the charge you pay when you exit the fund by selling it in a particular tenure. Entry and exit loads can easily eat into your investment value. It’s critical that you stay invested for the long term.
  5. Volatility: One must compare the returns they get from a fund with a benchmark like an index or other funds from the same category. This helps us gauge the beta or volatility of the fund compared to other funds and if this fun is right for you based on their risk profile.
  6. Opportunity Cost: Opportunity cost is the returns that you would’ve probably achieved if, you hadn’t taken a particular course of action and gone the opposite way. In a nutshell, it refers to checking out the returns of other avenues that are options for you to invest your money into instead of a mutual fund.
  7. Taxation effect: It is important to know the tax liability that springs from a particular scheme before you actually invest your money in it. You must be aware of whether your investments are tax-free or taxed. If there’s a tax levied on them, how much is it? One must always be informed of the answers to these questions.

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