Important things to check before investing in Mutual Funds
Mutual funds have emerged as one of the best ways to build a corpus in the long term. In this article we will talk about the important parameters to be checked before investing in Mutual Funds.
Investment Objective and Risk Tolerance
Before investing one should first identify his investment objective and risk tolerance i.e the risk you are willing to take. If you aim to earn capital gains for more than a year, choose a long-term mutual fund scheme wherein your money gets pooled in for a period of at least 12 months in case of equity or a balanced mutual fund and for at least 36 months in case of a debt mutual fund. However, if your investment objective is to earn current income, you should go for short-term mutual fund schemes.
Similarly, if your risk tolerance is high, go for equity mutual funds, otherwise, choose a debt or a balanced mutual fund scheme which tries to offset the involved risk by investing in both equity and debt instruments. A scheme which is aligned with your objectives and is in line with your risk profile is the scheme which you must opt for.
Check the investment allocation
While investing in Mutual fund one should check the asset allocation i.e where the money is actually being invested in? Is only debt or equity+debt or only equity? And in that too in which bifurcation. And based on his risk taking ability he should accordingly choose the mutual fund scheme. Eg; Equity is considered risky in comparison to debt, therefore the return potential of equity is also much higher in equity as compared to debt. The choice of asset is very important and it should be in line with investment objectives.
Background check about the Fund Manager
A check over the experience of the fund manager may ensure that you have given your hard-earned money in deserving hands. A fund manager with expertise in finance and ethical history will be an ideal candidate to go with.
Compare the fund with its Peer Group
Just knowing a mutual fund scheme’s own performance is not enough. It is also important to check how it has performed among its peers and benchmark. Remember this comparison should only be among the same type of mutual fund schemes means comparing apples to apples. For instance, a large-cap mutual fund scheme should not be compared against a small-cap mutual fund scheme. Try to select a fund that consistently outperforms its benchmark and has maintained its performance during market downturns.
Checking Mutual Fund’s Performance Consistency
Another important thing to check before investing in mutual funds is the scheme’s performance over the long term. Instead of checking how much returns the scheme has generated in recent times, make your investment decision considering how it has performed over the past 1, 3 or 5 years. It tells you if it is capable of giving you consistent or stable returns.
Mutual Fund expense ratio and load
While selecting the scheme one should also check the scheme expense ratio and the exit load. Exit load is a fee or an amount charged from an investor when he decides to redeem units of his mutual fund or leaving a scheme. Lower the expense ratio better is the scheme.
Taxation of Mutual Fund
Investor receives two types of income from Mutual fund investment namely capital appreciation and dividend depending on the type of scheme chosen. It is important to inquire about the tax liability arising from a particular scheme, before you plan to invest your money in it.