Mutual funds are an ideal investment vehicle for those seeking to create wealth by taking advantage of the capital market. Mutual funds can expose investors to the stock market without needing them to play an active role in monitoring individual stock prices. With their diversified asset classes placed into one scheme, mutual funds provide an ideal opportunity for risk management while investing.
There may be many motivating factors behind your investment decision, so it is essential that you make the decision only after analysing all aspects of your potential mutual funds’ investment; Here are five things an investor must take care of while Investing in mutual funds:
#1 – The objective of the Investment
In India, many often invest in mutual funds only because the offer or scheme was presented to them by their relative, friend or acquaintance. It is highly likely that at some point in life, you also were asked by an acquaintance to invest in a mutual funds scheme. Although investing in mutual funds is a good idea, an investment without a purpose may not be ideal for your financial growth.
One aspect that an investor must always remember is that investments should always be goal oriented, and the same goes for mutual funds. When deciding to invest in mutual funds, you must first assess the need you’re investing for. It is also important because mutual funds are created for different purposes and duration, so not all mutual funds schemes may be suitable for you. Once you’ve laid your goals straight, choosing the right scheme will become far easier, and will also increase the possibilities of realising your objectives.
#2 – Risk Profile Assessment
After defining your goals, the next decision that stands before you involve choosing the scheme that is compatible with your goal and risk tolerance. Mutual funds derive their value from different underlying assets. You may have seen the warning in mutual funds ads “Mutual Fund investments are subject to market risk…”. Once you’ve gotten past understanding this, you should also know that not all mutual funds have the same level of risk. As with any other investment, mutual funds with higher risks can deliver potentially higher returns.
While investing in mutual funds, you should carefully assess the risk associated with them. Investing in something that has more risk than your capacity allows can have a negative effect on your financial growth and on you, should the investment fail. If you want faster and higher returns on your investment, you can go with riskier asset classes with higher growth potential based on your risk appetite. However, you should stay away from assets that involve risk beyond your capacity.
#3 – The Fund House’s Reputation in the Market
Fund houses are the base of your mutual fund investment. When you invest in a mutual fund scheme, you entrust your money to the corresponding fund house, and the fund house manages your money on your behalf. While there are numerous fund houses in India specializing in different asset profiles, their reputation in the market plays a crucial role in attracting the investors. E.g., if an investor is asked to choose between investing in schemes from a relatively unknown fund rouse and the Reliance Mutual Fund, the investor is most likely to go with the latter. It is essential to evaluate the fund position of the fund house in the market, and only choose those that have proven trustworthy and reliable over time.
#4 – Fund Performance & Financial Ratios
As discussed above, there’s always an uncertainty about the actual returns on your mutual fund investments, so how you go about investing in a mutual fund after analysing knowing the risks? No parameter can assure an investor with certainty about the potential returns; however, you can look at past performance of the fund to conjure a rough an idea of the potential gains. It is also better to analyze the risk-return ratios over the time, which provides you with valuable information about how effective a fund has managed to generate promised returns on the investment.
#5 – Terms & Conditions
We have developed a habit of intentionally overlooking the terms & conditions. However, this habit may cost you your money. You should divide the entire Investing process into small steps and give adequate thought and attention to every step. Before signing on the scheme papers, thoroughly read all terms & conditions, and repeat this unless you truly understand them. You can also take the assistance of a trusted advisor who can explain to you the difficult terminology used in scheme papers. Making yourself familiar with the terms & conditions will protect you from surprises regarding the investment.
While mutual funds do have many advantages, investors must understand that not all mutual funds are the same. It should be obvious that any two mutual funds will not serve the same purpose, because they may be created for different target investors and different financial goals.