Mutual fund investments can be confusing, especially for first-timers and new investors. Here’s a checklist of questions to ask yourself when you invest in mutual funds.
You may be ridden with questions when you invest in mutual funds. Even seasoned investors sometimes lose their way while taking a pick from the plethora of mutual fund investment options. However, mutual fund investments aren’t as difficult as it is often made out to be. All you need to do is to keep in mind a few tricks, not just while selecting a scheme, but throughout the scheme’s investment term for efficient portfolio management. Ask yourself these questions time and again to assess that you are on the right track with your mutual fund investments.
Q1. Does it meet my investment objective?
We bet you had certain objective(s) in mind while you invested in a certain mutual fund scheme – buying your coveted dream house or that suave car or financially securing your child’s future, just to name a few. Are we ever short of dreams or aspirations? Either we are fulfilling our ambitions or securing our family’s. Our investment objectives vary and so does the terms.
For instance, if you have invested in mutual funds to finance your plan of buying a car after 3 years, you can opt for a short-term mutual fund scheme. In contrast, if your goal behind investing in mutual fund is to build a corpus for your kid’s higher education that you will need after about 15 years, you can invest in a long term mutual fund scheme. Beginners whose aim is to save can invest through the Systematic Investment option that allows the flexibility to save in the form of easy monthly instalments. The invested in equity mutual funds will help generate robust returns over a long term.
Q2. What’s your risk appetite?
Considering the wide range of mutual fund investments – equity, debt, money market, etc., which is the one that fits your risk appetite? Equity and equity-related mutual fund schemes are exposed to high market risks to achieve high returns. Hence, they are best suited for investors with a high risk appetite. In contrast, balanced mutual fund schemes invest in a mix of equity and debt mutual funds and, hence, are a suitable fit for those with a medium risk appetite.
Q3. What’s the past performance?
This is not the be-all-and-end-all criteria while making mutual fund investment decisions. The past performance cannot guarantee you healthy returns in the future, but it is definitely an important parameter you should check before making a mutual fund investment. It offers you a sneak peek into the returns that you may expect from the scheme in the future.
Q5. Are you aware of the costs? Duh!
This is one criteria that mutual fund investors, especially beginners, are either unaware of or skip checking while investing in mutual funds. Most mutual fund investments include entry load and exit load, expense ratio, among other hidden charges. Look for ones that are not accompanied by such charges. Even if they are, any rate over 1% is considered to be expensive. Management fees will also be applicable if you have hired a fund manager. Check for these charges individually to take a conscious decision.
Q6. Is your portfolio diverse?
Variety is the spice of life and same is true for your mutual fund portfolio too! Make sure that you invest in different types of mutual fund schemes, more than one but not more than three, to ensure balance in your portfolio. This enables you to switch between funds to prevent market risks and underperformance.
Q7. How to secure a regular, tax-efficient income from mutual funds?
Equity Linked Savings Scheme ELSS needs special mention due to the tax benefits that it offers as per Section 80C of the Income Tax Act, 1961. Accompanied by a lock-in period of 3 years, it generates healthy returns apart from offering tax benefits. If you are looking for a steady income source from your mutual fund investment, look no further than Systematic Withdrawal option. This option helps get a reliable source of income as per the frequency of your choice – monthly, quarterly, semi-annual and annual.
Q8. How good is your fund manager?
Mutual fund can be a tricky game owing to unpredictable market conditions. It requires a seasoned fund manager to analyse fund performances, invest in schemes that meet your objectives and risk appetite, take decisions regarding fund switch, etc. It’s best to work with a fund manager with an experience of at least 5 years to ensure that your portfolio is in good hands.
Q9. Did you read the scheme document?
Your preferred mutual fund scheme may have terms and conditions that you may be unaware of. Go through the scheme document when you invest in mutual funds. After reading it thoroughly, get all your doubts and queries answered by the mutual fund house, so that you take a well-informed decision.
To wrap it up…
Remember these basic questions during mutual fund investments and you would be a wide step ahead in getting your mutual fund game right!
Recommended Read: When is the Right Time to Rebalance your Mutual Fund Portfolio?