Confused on investing in the right mutual funds? Worry not. This 2 minutes read will guide you to invest like a pro with some valuable tips and tricks.
So, you are ready to include some mutual funds to your investment portfolio! Awesome!
Mutual fund is indeed an ideal choice to add diversification to your portfolio. But, with the wide variety of options available, you may not be sure which one to invest in right?
You are not alone here! Many people find it tricky to find the perfect fund.
Let me tell you, perfect mutual fund does not always mean investing in mutual fund with highest return. Right mutual fund is the one that is most appropriate for your investment portfolio that suit your needs and risk profile the most.
Now, you must be wondering how I am supposed to find the most suitable mutual fund.
Worry not. Here we have few tips for you that can help you get to your end decision.
Tips to choose the right mutual fund investment
With these useful tips, you can easily select the right mutual fund for your investment portfolio. Here are few of them.
Know your investment goals and risk profile
What is your investment objective? Are you investing for long-term wealth creation or you need the money back in near future?
What are you saving for – to pay children college fees or higher education or for your golden days?
Can you accept substantial change in your mutual fund portfolio?
First thing first, get all your questions answered. Identifying your investment objective is the first step of any sound investment decision.
Mutual fund offers various schemes that can suit varying investment objectives and risk tolerance level. There is a fund for every investor. First, identify your goal, whether it’s long-term, short-term or medium term. You can also consider whether you are in need of regular income or not. Be clear about how much risk you can take.
Know in which category you fall in, conservative, moderate or aggressive. Keep your desired time horizon also in mind while choosing!
Choose funds that match your investing style
If you are a long-term investor, then looking for equity-oriented funds would make sense as they can fetch you good returns over the long-run. If you are a short-term investor, prefer debt funds and liquid funds as you can exit anytime without losing on the capital.
Likewise, you can choose the fund types depending on your risk profile also. If you are a conservative investor, stick to liquid funds and debt funds as you look for capital safety.
Debt-oriented hybrid funds can be a good choice if you are a moderate investor. Equity funds, equity linked saving schemes are the ideal choice for you if you are an aggressive investor. Invest in equity with long-term outlook as you can fairly handle market volatility and risk. If you have more risk appetite, go with some sector funds. Choose the funds based on your objectives also- capital appreciation or regular income flow.
Evaluate past performance
It is important to look at the past track record even though future returns are not dependant on the past performance.
How the fund has performed against benchmark, consistency in performance, how efficiently it is managed by fund manager and volatility of the fund, etc. needs to be considered to have a broad insight.
But, remember not to make your decisions solely on the basis of past performance of any fund. A fund that did extremely well last year may not do well in future. Let your investment decision not be affected by short term market sentiments. Pay more focus on performance consistency.
Every asset management company earns by charging fees for managing funds. There are also exit and entry load for certain funds. Exit and entry loads are basically the sales fees charged by the mutual fund houses either at the time of purchasing or at the time of selling units. Consider the fund management fees and charges levied for exit and entry. As the cost involved affects the net asset value, thereby affecting scheme return.
Compare and choose the most suitable one
Once you are clear which type of fund suits you the best, it is important to consider the shortlisted plans to arrive at the right choice. Compare them on the grounds of risk, return and cost, etc.
So, how investors should approach the current market for better returns?
Here are few tips to approach current market better returns
- Investment decisions are to be based on your investment objective. Keep your focus on goal and risk tolerance while investing.
- Know your time horizon to reach out to a specific goal. Your long-term goals are unaffected by short-term market turmoil.
- Diversify the risk by investing in various fund categories of different fund houses.
- Follow your asset allocation
In the current volatile market scenario, it is good to choose systematic investment plan as a mode of investing mutual fund than a lump sum investment mode to avoid risk of timing the market.
As SIP gives the benefit of rupee cost averaging, investment will not be much affected by market ups and downs. But, do not stop them mid-way!
Why you should not stop your SIPs in mutual funds now
SIP approach to mutual fund has many advantages in every market situation. It diversifies the risk, averages your cost and convenient too. Though it’s not a fool proof safeguard against potential losses that you may suffer, it definitely reduces the risk. When the markets are up, you get lesser units and when markets are down, you accumulate more units. By investing in SIP without stopping it in between, your purchase cost for every market phase is averages. Irrespective of the market cycles, staying invested for long helps you get better returns.
Best mutual fund schemes to park money for a year
Liquid funds and ultra-short term funds are the best choice when it comes to investing in mutual funds for just a year. Ultra-short term funds invests in fixed-income bearing instruments with maturity of one to nine months duration. Hence, if you have lump sum money, instead of investing in one go in today’s market, you can choose to park it in ultra-short-term funds. Later you can move them to equity funds systematically through STPs (systematic transfer plan).
An all equity mutual fund portfolio is an investment option for an investor with a strong profile. It is apt for an investor who is well-versed with market fluctuations. An equity fund portfolio comprises of only equities. A complete equity based investment option carries a higher risk compared to other funds. With regard to your portfolio, if you have selected an all equity mutual fund portfolio, it is a very aggressive and a high-risk combination. You need to ensure that you can handle market volatility over the years in order to realise the benefits/returns on your investment.
In short, selecting the right mutual fund depends on your individual goal, time horizon and risk tolerance. Some amount of research and comparison of similar plans can help you come to rational conclusion.
Recommended Read: How to Build an Ideal Mutual Fund Portfolio?