Mutual Fund Investment: A Step by Step Guide
Are you thinking of adding mutual funds to your investment plan this year? Then your decision is the right one. No investment plan is complete without mutual funds. Mutual funds have grown from strength to strength as an asset class. They are clear winners for investors. In fact, they fit every individual’s financial need. Suppose you have chosen to invest in mutual funds online. Now follow these steps to choose the right funds for your needs.
Mutual fund investments are rewarding. But they come with various degrees of risk. So, start by asking yourself two basic questions:
Why am I Investing?
The answer to this will define your investment goal.
For example, are you planning to renovate your house next year? Then you should look for debt funds. These are safer in the short term. They come with assured returns. Suppose you want to invest in your child’s education 10 years from now. Then you should look for a balanced fund. This should give high returns while protecting your investments from market volatility.
How Much Risk am I Ready to Take?
Only you can answer this question. The answer depends on your present financial position. Mutual funds come with variable investment returns. It is important to remember this. Your risk tolerance will define how much risk you are able to take.
For example, do you have quite a bit of savings in your bank account? This could help you deal with an emergency right now. Then you should look for equity-linked mutual fund schemes. They offer much higher returns. That is because they stay invested for three years on an average.
How to buy mutual funds: Narrow Down Your Search:
Have you answered these two questions? Then you have already narrowed down your search to a large extent. Now you know what kind of funds you are looking for. You need to do some homework. This is how you can be smart about buying mutual funds.
Using online resources:
There are dedicated online mutual fund trackers, like valueresearchonline.com. These give you an idea of the funds that have been doing well in the market. You can look for the top fund rankings by reputed agencies like Morningstar and CRISIL. These are available online as well.
Choose funds with good ratings:
Rating agencies like CRISIL give various grades to mutual funds. The grades depend on performance and potential. Look for funds with higher grades.
Reputation of fund managers:
You want your hard-earned money to be in safe hands. The reputation of a fund house is important as well. This is built over time. So, it is wise to choose fund managers with a good reputation in the market.
Performance of the fund:
This could be the most important criteria. Has the fund managed to overcome the volatility of stock markets in the past five years? Did it fall flat after oil prices in the international markets came crashing down? Suppose the fund has performed well under these circumstances. Then go for it. Track its performance over the past three and five three years. This is a good way to choose a fund.
•Choose no-loads funds:
Some funds come with hidden charges. These hidden charges are in the form of entry and exit loads. The charges may not seem like much. But they can go up to as much as 18% of your total investment. Be careful of such funds. Choose funds that come without any ‘loads’.
Track monthly disclosures:
SEBI is a market regulator. SEBI has asked all mutual funds to disclose their portfolio of investments every month. This is compulsory. You can find the disclosure on the fund’s website. Make sure that the fund has wide investments in various stocks. Well-diversified funds have performed better in the long run. They have also run lower risks.
Buy mutual funds online:
Wondering how to invest in mutual funds online? Have you decided which fund you want to invest in? Then log on to the fund’s website. Identify yourself through an e-KYC (Know your Customer) based on your PAN card. Now select your fund. The website will create your portfolio in a few minutes.
In the past few years, mutual funds have emerged as a delight for investors. Their popularity is rising. This has led to a surplus of mutual funds. Now, there are about 11,000 funds in the market. This number is double that of stocks listed on the Bombay Stock Exchange. Not all funds are doing well, though. So, investors need to be choosy. Do your research. Then it will be easy to pick a winner.