Just like hasty climbers have sudden falls, hasty mutual fund (MF) investors suffer poor returns. The mutual fund market, though rewarding and easily accessible, is selective in offering its favour. The best rewards are reserved for those investors who take time out to do their due diligence – of the market and their investor profile.
So, here are the top things you need to consider while investing in mutual funds.
1. Your risk profile and diversification
Your portfolio’s performance hangs by these threads. If you can handle a moderate level of risk but end up building a portfolio of only highly volatile equity funds, you’re putting your money in danger. Conversely, if you create an all-debt fund portfolio with a high-risk profile, you’re failing to leverage full market potential.
Make sure you identify your risk profile and align your portfolio to it for maximising returns.
2. The investment horizon
Different fund categories are suitable for different investment horizons – debt funds for the short-term and equity funds for the long term. Say your investment goal is to build a retirement corpus within 10 years (long-term goal). In this case, a portfolio of only debt funds will never fly. Likewise, hoping to generate high returns from equity-focused funds within 2 years will leave you disappointed.
So, ensure you define your investment goal, identify the investment horizon, and choose your fund mix wisely.
Additional Read: What Are the Advantages of Investing in Mutual Funds?
3. Fund performance
Did the fund deliver results that were consistent with general market returns? Was there a high turnover that might impose burdensome taxes and costs on investors? Was the fund volatility high when compared to major indexes? These are some questions you need to answer as they will help you assess the past performance of a fund, the market condition, and your investment strategy. Whether a particular fund is worth your time and money is determined by judging its past performance.
4. Fees and loads
Investing in mutual funds usually involves a number of different fees and charges levied by the AMCs. Get to know these charges before you invest. Some may be levied at the time of fund purchase, such as a front-end load, while some such as the back-end load are charged at the time of selling the units. Calculate the total cost of owning a mutual fund and make an informed choice.
5. Direct vs. regular plans
The expense ratio or the annual maintenance charge levied for fund management of direct plans is low when compared to regular plans. This means the former offers higher returns than the latter. However, a lot of investors confuse direct and regular plans as different MF schemes. The two are different in the sense that direct plans do not require an agent or broker. So, no commission or brokerage needs to be paid. This brings down your annual investment costs.
Additional Read: 5 Misconceptions about Mutual Funds in India
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