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The appeal of mutual funds may have got you at last! The combination of flexibility, liquidity, high rate of return in the long-term and tax benefits have made mutual funds quite popular among investors, of late. In this asset class, you do not have to spend a lot of time tracking the market as your money is deftly managed by a seasoned professional fund manager, with decades of experience under his belt.However, before casting your lot with a mutual fund, you need to consider the risk factors – the often-neglected fine print – that are an inseparable part of any investment. At the same time, you need to consider these things to make an intelligent choice:
Financial goals
If you are just starting, you may be tempted to start investing in mutual funds because everybody else seems to be doing it. The Fear of Missing Out (FOMO) factor is at play.Keep your short, medium- and long-term financial goals front and centre when deciding on a mutual fund. Note that each fund serves a specific purpose. Choose a fund that aligns with your life goals.
Risk profile
Not all mutual funds are alike. Some invest aggressively to multiply returns in a high-risk winner take all fashion, while others like Equity Linked Savings Schemes (ELSS) have a fixed lock-in period of 3 years, making early withdrawals impossible.If you are investing in mutual funds for the very first time, make a list of all your assets and liabilities, current income and expected life goals to arrive at your risk profile. This will also help you determine the amount you can set aside each month if you are investing via Systematic Investment Plan (SIP).
Investment horizon
Investing in mutual funds does not guarantee positive returns in the short term. While they certainly outperform fixed options in the long run, you need to stay invested even when the market fluctuates, to see the best results.In the same vein, check long term returns, 5 years and more, of a fund to determine whether it is a good fit for your risk profile.
Expense ratio
Any fund with an expense ratio of more than 1.5% may impact the net returns and the accumulated corpus. It is advisable to check the expense ratio before investing. Though SEBI has fixed expense ratios that AMCs can charge for funds, you can invest in direct plans to save on costs.
Conclusion
To make the most of your mutual fund investments, stay invested over a period of time to earn decent returns. Also, take time to identify any low performing funds in your portfolio every 6 months.If the fund has been consistently performing below average with no signs of improvement for a considerable period, it is best to sell it. This will help you direct your money into funds that have the potential for growth.
DISCLAIMER
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
