Mutual funds are one of the most popular investment options for novice investors, more experienced investors and those who have a lot of experience in investing – everyone needs to know that there is a fundamental and passionate, informative option to build their knowledge to be smart.
In short, a mutual fund is an investment plan that accumulates the funds of many investors in one pool to create an investment product. The fund manager can then invest this money to buy various securities including stocks, gold, bonds etc. However, every mutual fund will have a definite objective.
You can invest in mutual funds either through a systematic investment plan (SIP) which requires the investor to invest at regular intervals or through a one-time investment from time to time. Mutual fund account opening is seamless and convenient as online platforms today help first time investors complete the registration process in minutes and it is important to know how to choose the right mutual fund for investing in a completely paperless manner. In
Steps to choose the right mutual fund
1) Do your research
There are a number of criteria to consider when choosing the right mutual fund – expectation of return, risk tolerance, investment horizon, investment knowledge, etc. AUM), your fund manager experience and more. Initially, it is important to do a certain amount of research before embarking on your investment journey as research will help you make more informed choices and help you get a clear idea of “what is” in the mutual fund space.
2) Know your goals
Before choosing a mutual fund, the first step is to set a goal – the period for which you want to invest, the expectation of return, etc. However, in the absence of a clear goal, no one needs to shorten their journey.
The goal can also include the purpose of the investment. For example, there may be long-term goals, such as higher education, a down payment for a home, or retirement. Depending on the goal, an individual will be able to determine the appropriate mutual fund category – Debt Mutual Fund, Equity Mutual Fund or Hybrid Mutual Fund.
3) Perform risk analysis
This applies not only to the risk appetite of the investor but also to the risks involved in each mutual fund and whether they match their risk tolerance. For example, equity mutual funds come with high risk and some fluctuations in the portfolio. But the returns from equity mutual funds are often higher than other funds, making them suitable for investors who are willing to use a “high-risk, high-reward approach”.
Debt mutual funds, on the other hand, come with less risk and are more stable, but returns are lower than equity mutual funds and are often ideal for conservative investors and beginners.
4) Check the cost ratio
The amount of expenditure is the commission charged for proper management of the investment. As an investor, it is important to find a mutual fund with a low cost ratio as the cost is calculated in the overall portfolio of investments and has a significant impact. It is often said that the higher the AUM, the lower the cost.
5) Consider taxes that attract your investment
Tax consideration is something that investors, especially beginners, should not ignore. Returns from equity mutual funds are taxed based on holding period and applicable tax rate. Mutual funds are often efficient in terms of post-tax returns. For example, long-term capital gains (36 months and above) are taxed at 10% more than the discount limit of INR 1 lakh, while short-term capital gains are taxed at 15%.
Starting an investment journey can seem like a daunting task but once you start investing and learn more about investing, different words etc, investing will become a healthy habit that will help you build wealth. The above factors need to be considered before choosing the right fund for a successful investment. You also need to monitor the performance of the fund and make changes if necessary. It is also advisable to build a diverse portfolio by investing in different asset classes.
Disclaimer: The views, suggestions, and opinions expressed here are the sole responsibility of the experts. No journalist was involved in the writing and production of this article.