Things to check before investing in Mutual Funds

Things to check before investing in Mutual Funds

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.

Power of compounding: Reason to invest

Everyone talks about the investment, why we should invest is still not clear to most of them.

So, what is compounding?

Compounding is the method of earning income from your previous earnings by reinvesting them. Lets understand this with a simple example:

Let us assume that someone invested Rs 1000 per month for 20 years and if the expected rate of return is 10% per year. The interest for the first year would be Rs 565. In compounding, First year’s interest is added to the principal in the second year and so on. So, Second Year Principal will be =(12000+565)=12565 and interest will be Rs 1881.

For more detailed table and graphs, refer to Poonje’s SAVING CALCULATOR

After 20 years, total amount invested will be Rs 240,000.00 and total interest earned will be Rs 519,368.00. If you look closely total interest earned is more than 2 times the amount invested. So, let me simply say this, put your money to work and let it earn more money for you.

Thus, we see that as the time goes, earnings do not multiplies but grows exponentially.

How to make best use of compounding (make your hard earn money to earn more money for you)

Start early

As seen in the above example, you were able to grow an investment of Rs 1000/- per month to nearly Rs 759,368 (invested amount Rs 240,000 and total interest earned Rs 519,368) in 20 years.

However, if you extended the investment horizon by another 5 years, you have earned much more Rs 1,326,833 (invested amount Rs 300,000 and total interest earned Rs 1,026,833).

Thus, the longer you hold more you gain from compounding effect. This is one of the primary reasons to start investing early.

Think before invest

Before investing, think about your investment objective, time period & your risk tolerance. After that choose the investment products that give you a higher rate of interest and meets your objective. Example investing in Fixed Deposit have low interest rate but little to no risk than Mutual funds. Investing in Equities has high return and high risk.

Invest regularly in order to grow your investment

By regularly increasing your investment amount, you can make a huge difference over the long term. Even regular investment helps you, budget your day to day life & restricts you from overspending.

The best way of making your money grow, is to stay diversified and keep investing steadily. If you invest a set amount regularly, you will automatically take advantage of volatility in the market and can grow your investment. Thus, the slow and steady approach tends to yield more growth and less stress.

5 Reasons: why Retirement Planning is Important

Retirement should be the best time of your life, when you can relax and enjoy your life with your loved one. This is the stage when your body becomes tired and want relaxation, So, If you wish to be financially independent and achieve a worry-free retired life, you should plan ahead for your future.

(Use our Retirement calculator to calculate how much to save for your retirement.)


Inflation is a one of the primary reason, one must take into account while planning for his retirement. As we all know that the purchasing power of money falls with time, which means we need to spend more in future for purchasing the same good & services. Thus, calculating your retirement funds as well as your expenses become essential.

Medical emergencies

With increasing age, health problems increases, as our body becomes weak. Medical expenses may make a huge dent in your income after retirement. So, if you have sufficient retirement fund to cater to any unforeseen healthcare expenses, you won’t feel to be a burden on your future generation.

Financial Freedom & Security

Investing early shall not only help you gather more funds in the future, but will also help you to achieve financial independence in retirement years.

Post retirement, your invested amount, savings and your returns on investment will help you to plan for bright & secure future.

Getting stuck in the savings mindset

People tend to get hung up on how to save every month. The amount does not matter, even a small amount starting at an early age, can help you save a huge money for your retirement. Thus the later you start, the more and the longer you will have to save and invest to reach a particular retirement amount.

Nuclear Families a trend

Nuclear family is a trend this time. In Indian societies we found it difficult for senior citizens to move themselves from their hometown and stay with their children. In some situations children are not willing to live with their parents. Thus, it is better to make investment decisions during your working life and put your hard-earned money to work for you in future. If you can manage your finances well and could gather sufficient retirement savings, you can live an independent life of your choice.

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