Mutual funds are something that every lazy investor would opt for. If you do not have enough time to monitor the happenings of Dallal Street, then you are better off with mutual funds. Mutual funds let you take advantage of the market gains without asking for your time. With mutual funds, even small-scale investors get to make most of their invested money since their investment is being professionally managed into diversified fund portfolios.

However, with the advent of hundreds of mutual fund schemes and asset management companies, you might get confused when it comes to making a choice. Instead of blindly going with recommendations and popularity of companies, it would be wise to do some homework. A lot of people are prejudiced when it comes to learning about finances and investment schemes. They think there is too much information out there and it would be difficult to fathom. All they want to do is invest on reliable schemes to get tax redemption. However, understanding mutual funds can be quite a simple task and this article will prove you just that.

Given below are some basic points that you need to review before putting your finger on any mutual fund scheme.

  1.  Setting your expectations and goals:

First and foremost, you must be clear about your expectations regarding the mutual fund returns that you would gain. Is it a long-term profit that you are looking for, or do you wants short term advantages out of your investment? This way you can narrow down your choice drastically in the very initial stage. The timeline plays an important part in your decision of keeping your money blocked in the funds of your choice. Most mutual funds charge high sale charges for short term liquefaction of investor returns. On an average, you are looking at a period of five years to get healthy returns from your mutual fund investments.

Furthermore, you need to self-assess your financial ability of risk tolerance before you finalize on a fund. Accordingly, you would have to choose a portfolio that includes funds that are capable of dramatic swings (for example: equity oriented mutual funds) or the more stable and conservative options (for example: debt mutual fund schemes). You will be thereby guided by your mutual fund advisor to make a portfolio that suits your risk-tolerance the best (assertive, conservative, aggressive, etc.).

  1. Choosing the right company:

Like we pointed out before, there are many asset management companies out there in the market who will offer to mutually invest your money and all of them are certified by SEBI (Securities and Exchange Board of India). However, you need to personally background check your company of interest to see the history of the mutual fund house. You can find all the information regarding the mutual fund house, their promoters and their entire history while in the financial services domain, thanks to the World Wide Web.

This is an important step, especially for those who are novice in the investment game, to be sure that your money will be in good hands.

  1. Reviewing the fund performance:

Any scheme that you have shortlisted, you are to check its past performance to completely analyze it. This is just like doing a thorough research about any individual company whose equity shares you are going to purchase. However, past performance does not always guarantee equally enthusiastic future performance and should not be your only measurable yardstick. You must also consider looking into the risk-adjusted returns that it clocked and as to how frequently the fund churned a portfolio. Always do a comparative study of the fund performance in different market cycles to get a better idea about its deliverability.

Moreover, make sure that you have measured the fund performance over a long period of time to judge the pattern of its performance over the years. This way you can also quickly run a risk analysis of the fund in your mind and see if that fits your risk-taking ability. Just going by fund ratings is not the best practice.

  1. Considering the fees of the company:
    Every mutual fund company have charges for the investors and this is no secret. However, companies can make a fool out of you, if you are unaware of the components of the fees and charges that they extract out of you.

There is something called a load fee on some of the funds that you are liable to pay either during the initial investment time or when you sell it. The former one or the front-end load fee is a mandatory initial payment but the latter or back-end load fee is charged only when the investor sells the investment out-of-turn or prior to the mutually agreed upon period. Typically, both the load fees range between 3% to 6% of the total investment amount with an outer lawful limit of 8.5%.

If you do not want to share your earnings with the fund house and hence want to avoid these fees, then you got to look for the no-load funds that are devoid of any front-end and back-end load fees. Different companies structure their fees in different ways. So, other fees that can be included are management expense ratio, transaction cost, administration fees, advisory fees, fund manager’s expenses, etc. The so-called no-load funds can charge fees in these ways as well and here comes the importance of comparing different funds before taking a decision.

The management expense ratio of any company will give you an overall idea about the sales charges of the company. This ratio is nothing but the percentage total of fund assets charged to cover fund expenses. The investor must interpret the ratio in the following way:

  • The higher the management expense ratio of a company, the lower will be the return from your investment at the end of the term.

Another latent fee that is charged by some of the fund houses is the 12b-1 fee. These are incorporated in the share price itself to keep the buyer unaware of its presence. The earnings from this category is dedicated for marketing, sales and other promotional activities of the fund shares. However, do not feel cheated in this aspect since 12b-1 fees can only be charged as much as 0.75% of the fund’s average assets/year, as dictated by law.

All you would want to ensure is that the fund house you choose does not impose any unreasonable charges on you, when compared to their competitors.

  1. Achieving clarity regarding tax exemption schemes:

For a lot of investors, the primary aim of any kind of financial investment is to get tax rebate. Thus, before investing in mutual funds, you must look into this aspect first. Like in bonds and stocks, mutual funds’ tax rebate also varies based on long-term and short-term investments. You can also calculate the absolute returns from your fund scheme by considering the tax-returns in mind. Before taking the plunge, cross check with the following points:

    • Will you be able to claim tax exemption on the entire amount of your investment?
    • If the answer to the above question is a yes, then is there a clause of specific years of lock-in period to be eligible for availing the tax rebate?
  • Will the tax exemption cover the returns, dividends and pay-outs as well?
  1. Assessing the fund managing team and manager:

Your hard earned money is going to be managed by someone else, and that someone else better be the capable enough to multiple your bank balance. This is exactly why you must look into your fund manager`s history and investment strategies. The complete performance of your fund scheme is dependent on the expertise and skills of the fund management team. Be sure to properly check their credentials and keep a healthy and open interaction to stay updated on everything that pertains to your funds. A good fund manager, along with his team will get you good returns even in a challenging market scenario.

  1. Diversifying your portfolio:

Mutual funds can be explained like a basket of investment. One single fund can help you invest in a bunch of different stocks and bonds (holdings). A fund with more holdings means lesser volatility and vice versa. On an average, it is considered safer to opt for funds that have around 50 holdings.

To diversify your portfolio, make sure to include stocks and bonds from different categories that will move up and down in different market conditions. This kind of diversification will provide protection against losses since if one sector of the market is under-performing, the other sectors will keep your portfolio healthy by counteraction. Very rarely does the market crash in a way that all the sectors go down, else the ups and downs are sector specific. This is a technique of risk management that you must keep in mind to minimize losses in tough times.

Many mutual funds offer diverse portfolios, in which you can invest a large chunk of your savings without worrying too much about losses. Large-cap fund schemes are a safer option where maximum percentage of your money will be invested in large and stable companies. This means your portfolio will have less volatility when compared to mid-cap or small-cap funds. However, if you decide to be too safe in your fund portfolio, your upside returns will be smaller too.

You must also look into the turnover of the fund you have selected, which is measured to show the trading activity of the fund. Turnover will tell you about how frequently the fund manager buys and sells stocks or bonds in the fund. Turnover is given as a percentage known as Turnover Ratio. A low turnover (20%-30%) means more of a buying and holding attribute and has low trading costs that are advantageous for investors. High turnover (100% and more) means a lot of buying and selling that adds up to the trading costs for investors.

  1. Reading the terms and conditions carefully:

The fine print of every company differs and you may be surprised with some of their individual clauses. Instead of being surprised later with the list of company charges, it is wiser to put your guard up beforehand. For this, you need to carefully read all the scheme-related documents and question about anything you do not understand. Especially for first timers a lot of financial jargon might feel like Greek and Latin but nevertheless, make sure all your doubts stand cleared by the fund manager.

The fine-prints of companies also help you filter some of the fund houses since some fund houses have more investor friendly terms than the others. Also, sign-up for regular updates of your portfolio to keep analyzing the growth of your money to make an informed decision or withdrawal when the situation demands.

Post your detailed homework, if confusion still prevails to cloud your decision, visit a competent financial advisor who can better judge funds for you, for a small consultation fee. Mutual funds are the best way for investors to gain from the equity market, with all necessary diligence and caution exercised prior to investment. Seeking help from a financial advisor will make your job easy since they will understand your financial requirements and liabilities in a way that you cannot assess.

Since mutual funds are subjected to market risks, people often categorize this investment roller coaster as a bumpy ride. However, if you have the map of this roller coaster well studied beforehand and have your seat belt securely fastened before your journey, you will make the most of your ride and enjoy the experience.

Now that you have been educated to make a wise decision regarding your mutual funds, you need to be prepared with certain documents to open your mutual fund account. You can begin by being KYC (Know Your Customer) compliant and provide all your personal details to get going. Modern schemes also give you an option of paying all your investment amount altogether in a yearly manner, or conveniently provide in recurring monthly installments. So, even if you have shortage in liquid cash, you can choose to go for mutual funds that allow monthly deposits.

Author Bio: Donald Belcher

Writing is a passion for me and it helps me to get away from all the stress that I face in my everyday life. It is the main reason for me to pick freelance writing as my professional career. I am good at academic writing and therefore, I help students who approach me to best essay writing service and I also find pleasure in writing blog articles.


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