Basic Factors To Be Considered Before Investing in Mutual Funds
Manvi Jain -
Jul 16, 2019
The problem with the 21st century seems to be that of having too many options. Right from buying a mobile phone to buying a car to choosing an investment product there are a number of options available today. The fact is that there can never be one good product which suits everyone’s requirement. So, it is indeed important to know what factors one needs to consider before making the right investment decision.
1. Fund Performance The most important thing to remember is that past performance doesn't guarantee the future performance of the fund. Having said that, reviewing the past performance will tell you about the kind of returns the fund has given over a time period. Ideally you should check the past performance for a one year, two year, and five-year period. Also see how the fund has performed in a bull and in a bear market
2. Investment Objective and Type of the Fund Every person has different objectives of Investments such as safety, Income, Capital growth, Tax minimization, Liquidity etc etc. So keeping in mind these objectives, Mutual funds have several types of funds to cater to individualized needs.
3. Fund Manager and his/her expertise The fund manager influences how the fund performs, since he/she along with a team of analysts and experts are investing on your behalf. Knowing who the fund manager is, his/ her performance record, the investment ideology and the AMC's investing ideology is important
4. Expense Ratio Mutual funds charge a fee for managing your money which is called Expense ratio. It constitutes fund management fee, agent commissions, registrar fees, and selling and promoting expenses. In the long run, these small costs can have a large impact on your returns. A difference of 0.50% in recurring cost over a long period such as 10 years can matter a lot. As per SEBI regulations, the maximum expense ratio of an equity fund can be 2.5% and for a debt fund, it should not cross 2.25%.Normally, the bigger the size of fund, the lower is its recurring cost.
5. Additional Factors
In addition to the above factors, the investor first needs to understand his/her Risk taking ability and willingness, Investment Horizon, Financial Goal, existing market conditions and the applicable tax structures and Expected Returns.
Since, the process of Mutual Fund Investment involves various factors to be evaluated and analysed, hence its best to invest through an institution that would monitor and track your funds and incase of any diversions, can review and take the corrective course of action. Choosing the right platform is utmost important as it will decide how effective your returns would be through your investments.