A mutual fund investment requires due diligence in ascertaining your risk appetite and defining your investment goals. Once you are ready to invest in mutual funds, you may want to analyse them to understand how you can receive maximum returns.
Before we begin the article, let’s take a look at some basics.
What is a mutual fund?
A mutual fund is an investment programme that collects money from different investors to purchase company stocks, bonds, and shares.
Types of mutual funds
Mutual funds can be broadly categorized into equity mutual funds and debt funds. When you compare equity funds vs debt funds, equity funds are more suited for investors interested in long-term growth. Investors who wish to grow their capital at a quick rate prefer these funds.
Here are some factors to consider before investing in equity funds
Risk tolerance
Before you invest, it is essential to analyse your risk profile. The riskiness of equity fund can vary with different mutual funds. While mid-cap and small-cap equity funds carry a higher risk, balanced funds can offer better stability. You may want to examine your risk tolerance level if market volatility affects you. It is a good idea to decide whether you can meet your financial goals with a conservative investment strategy or you can afford to take high risks.
Holding period
According to a recent report by The Association of Mutual Funds in India, 51% of equity funds get withdrawn even before a year finishes. This is because investors make decisions based on the recent performance of the funds. As the market under-performs, they pull out their money. It is important to note that different fund categories work best at different time horizons. It is most beneficial to choose equity funds if your time horizon is more than five years. This is because the market can be highly volatile in the short term but can give you increased earnings, over time.
Consistency of performance
As an investor, you may want to consider the qualitative as well as quantitative factors when shortlisting mutual funds. To obtain a holistic understanding of a fund’s performance, you may compare it to its active peer group. A good equity fund is one that can generate good returns consistently in both bullish and bearish periods. If you invest in a mutual fund based on occasional good yields, it could prove disadvantageous in the long run.
Fund manager’s experience
It can help to take the advice of a portfolio manager to handle your mutual funds’ investments. However, it is essential to find out how long they have been in this field. You may want to examine the fund manager’s experience with the funds in question or other funds he has managed in the past. You can also check if the fund manager has invested a substantial portion of their funds in their own recommendations. This can be a good indicator of their confidence in a fund.
Expense ratio
The expense ratio of a fund is the fees charged by an Asset Management Company for the management, administration, promotion and distribution of a mutual fund. In short, it is the cost of owning the mutual fund. The mutual fund has to break-even this amount before it can start growing your wealth. In short, the lower the expense ratio, the better it is for you.
Conclusion
Mutual funds investment plans require a good deal of patience. It is essential to be patient and not rely solely on immediate returns while investing. You may want to stick to a financial plan and align your investments with your financial goals.