When you think about the most popular investment products, mutual funds remain investment choices that novices can take up, or suffice for expert investors – all one has to know is the fundamentals and the zeal to grow their knowledge in order to make clever, informed choices.
Plainly put, mutual funds are investment schemes that garner funds of many investors into a single pool for creating a diverse investment product. A fund manager operates a mutual fund. After collecting funds from various investors, the fund manager invests this collected wealth to buy a range of securities. These include gold, stocks, bonds, etc. Nonetheless, every mutual fund has a distinctive objective.
When you buy mutual funds, they can either be invested in through a SIP (systematic investment plan) that requires the investor making investments over certain periods intermittently, or by way of a single investment. While you can open a mutual fund seamlessly and conveniently online, without any paperwork involved, it’s crucial that you know how you should select the right mutual fund for your investment. There are certain things to check and look into before you take the mutual fund plunge. Once you know how to go about your task of investing in mutual funds, the exercise should be easy. Consequently, you can be sure you have covered all your bases and selected the fund that best suits you. Five important things to look into before you swoop into your mutual fund investment are mentioned so you educate yourself first.
1. The Importance of Research
One cannot stress the importance of doing research well. This is especially so when making investments of any kind. In choosing the correct mutual fund, several parameters must be considered. These are expectations of returns, risk appetite/tolerance, your unique investment horizon, your knowledge of investment, etc. Furthermore, the actual mutual fund investment can be evaluated according to its prior performance, assets under management (AUM), expense ratio, the experience of the fund manager, and the like. Initially, it’s crucial for you to undertake a specific amount of research in advance of you actually going ahead to buy mutual funds online and start on your investment path. This will aid in you making an informed choice, rather than a guess, enabling you to get a clear picture of what’s what in the space of your mutual fund.
2. Consider Your Goals
Before you get a handle on your mutual fund investments, you should know your own financial goals. Decide your objectives according to the time frame of your investment, expectations of returns, etc. These help you to select the fund that meets your needs. Note that mutual funds may not just invest in securities, but other assets like gold and bonds, so your goals should ideally match the asset classes a particular mutual fund offers, in terms of returns, and time periods. Nevertheless, if you don’t have a clear cut goal in mind, your investment journey can be hindered.
Your goal may also reflect the purpose served by your investment when you want to buy mutual funds. For example, you may have long-term goals that your investment may serve, like further education, buying a home, or long-term retirement goals. Depending on your specific goal, you can determine the corresponding mutual fund class - equity mutual funds, debt mutual funds, or hybrid-type mutual funds.
3. Analyse Risk
Not only looking at your own risk appetite as an investor counts, but also having an understanding of the risk that any mutual fund brings is of crucial importance. Also, you have to consider this: does the mutual fund you are looking at align with your tolerance for risk? For instance, mutual funds in equity bring a high degree of risk to the table relative to funds of other assets. A portfolio that contains such funds may well see dips and highs during the short run. However, the returns you get from equity-based mutual funds are frequently higher than those of other asset mutual funds. This makes them a match for those investors who are prepared to go with the approach of “great risk, more reward”.
Contrastingly, you’ll discover that debt-based mutual funds pose a low risk and give you more stability. This gives you peace of mind, if you don’t want risk, but you also get low returns. In case you see yourself as a conservative investor, or are a beginner, starting with debt funds is a good idea. These pose less risk, but they are highly steady, returns being lower than equity mutual funds. They may be perfect for investors with a more conservative mind-set and those who are investor beginners.
4. Look into Expense Ratios
The commission that is charged to see to the adequate operation and management of the mutual fund is the expense ratio. You shouldn’t be spending high amounts just to make low gains. As you are an investor whose priority should be profit, you should look into seeking a mutual fund which gives you a low expense ratio. Expense ratios are computed across the total portfolio of the investor. Consequently, they have a substantial impact on what you spend as an investor. In the investment of mutual funds, it’s often apparent that if the assets under management (AUM) are high, the expense ratios tend to be low.
5. Check the Taxes in Investment
Your investment is likely to attract tax. Consideration of tax is something you cannot ignore, whether you are a novice or an experienced hand. The returns received from equity-based mutual funds are liable to be taxed. The tax is charged according to the applicable rate of taxation and the holding period. With regard to post-tax returns, mutual funds are an efficient investment. For example, regarding long-term capital gains (3 years and above) taxation is at 10% above the limit of exemption of Rs. 1 lakh. In the case of short-term capital gains, these are taxed at a 15% rate.
Buy Mutual Funds and Rest Easy
When you commence your investment journey into the mutual fund universe, it may seem daunting at first. However, if you have looked into some aspects of investing, you won’t find the task too hard, and you will be pleasantly surprised at your gains later. Knowing the jargon, doing your asset homework, etc, can smoothly take you into the investment arena. The first thing you can do is to explore areas of investment, and you can open a demat account with a broker who has investors’ interests at heart, Motilal Oswal.
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