Things to Know Before Investing in Mutual Funds

Investing in the best mutual fund often appears to be a challenging task – not just for beginners, but regular investors as well. Read on for a few simple tips on making smart mutual fund investments.

The phrase ‘right mutual fund’ is an inconclusive term. What may be ‘right’ for you, might not be the same for another individual. Our financial objectives and expectations from mutual fund investments will vary widely – investment term, risk appetite, the extraneous charges that we don’t mind paying, just to name a few. Therefore, the right or best mutual fund refers to the investment that is the most suitable for your unique investment needs.

Here, we’ve listed the things you need to keep in mind while investing in the best mutual fund.

There are several parameters you need to consider to ensure that your financial goals are in sync with your mutual fund investment.

So, what does investment objectives include? Let’s take a look.

• Investment horizon: This implies to the investment tenure, i.e., the time period for which you plan to stay invested. Are you looking for a short term or long term or mid-term MF scheme? Are you searching for schemes that will ensure liquidity in a few years? Get a clear answer to these questions as a first step towards selecting the best mutual fund.
• Financial goal: What do you plan to achieve with the returns on your investment? Is it for an immediate financial requirement? Are you building a corpus for your post-retirement age? Or, financially securing your child’s future, like his/her education? Or, are you looking to supplement your current income, or aiming at long term appreciation? Defining your financial goal is another vital step in choosing the right mutual fund.
• Risk appetite: The risk that a mutual fund is exposed to is determined by its investment horizon. A short-term mutual fund investment is exposed to high capital market risks to generate healthy returns within a short period of time.

In comparison, a med-term fund will exposed to comparatively lesser risks as it has a longer time to stay invested in the market. Hence, a long-term mutual fund faces the least risk. Understand your risk appetite to decide on the investment horizon that meets your objective to ensure that you choose the best mutual fund for yourself.

You need to have a close look at the past performance of a mutual fund before investing in it. Albeit, it is not a guaranteed prediction of how the scheme will do in the near future. Nonetheless, it is an essential part of the process of selecting the best mutual fund. Analyse these parameters while tracking a mutual fund’s performance in the recent past – risks it was exposed to, type of portfolio held and its features, risk-adjusted returns, number of fund switches the portfolio has been exposed to, etc. Confirm the additional charges involved

• Expense Ratio, Entry Load and Exit Load: Now, what do these mean? If this is the question that has crossed your mind, here’s defining these terms for you. Expense Ratio is the annual charge that you pay to your fund manager for efficient portfolio management. For instance, if the Expense Ratio of a mutual fund is 2.5%, it means that you have to pay an annual charge of Rs. 250 to your fund manager.

Entry Load is the percentage of charges levied on a mutual fund scheme during the purchase of a MF scheme. Similarly, Exit Load refers to the percentage of charges levied on a mutual fund scheme while selling the units. This means that investors have to pay an additional amount, which inevitably eats into their profit margin. However, the good news is that not all mutual fund schemes have an Entry or Exit Load. In case you prefer to not pay an Entry Load on your mutual fund investment, you can always opt for one on which an Entry or Exit Load is not applicable.

• Avoid MF with high turnover ratios: Turnover rate is the percentage of the portfolio that is purchased and sold annually. It is difficult to believe in mutual funds that constantly churn an annual turnover of over 50%. Therefore, it’s best to avoid them to be on the safe side.

Take some time out to find yourself an experienced Asset Management Company (AMC). Do thorough research of the company, their history, the industry experience and skillsets of the fund managers, company performance and turnover. This will give you an idea of their score in the investment industry. Finally, don’t forget to check whether the managers have invested a significant portion of their net worth.

Investing in the best mutual fund isn’t a child’s play. However, it isn’t like climbing the Mt. Everest either. You may take time in figuring your way out, but it will become easier once you get a hang of it. So, when you are starting out to make the best mutual fund investment, or are stuck somewhere, follow the above tips to go head-on. After all, practise makes perfect, doesn’t it? Well, almost perfect in the case of mutual funds!

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