Mutual funds are one of the most buzzing investment options lately. Most millennials prefer realising their goals by investing in mutual funds. This is because mutual funds are the only investment option that provides investors with a high degree of flexibility and liquidity. This has caught the attention of investors, and they are shifting to mutual funds.
However, you have to be careful while picking your mutual fund plan. Every mutual fund comes with a particular set of objectives to achieve. Therefore, you have to understand what the fund intends to do and the levels of risk it is going to take to achieve the same. Here are four ways to select the right mutual fund plan:
1) Ensure that the fund falls under your risk appetite
The risk levels of mutual funds vary across fund types and plans. This makes it very important for investors to understand their risk appetite clearly. If you are a risk-averse investor, then investing in debt funds is suitable as these funds invest in fixed-income assets across debt and money markets. Debt funds are further broken down into multiple categories, and the onus is on you to select the plans that fall under your risk appetite.
2) Set a timeline to achieve your goals
Every mutual fund investor invests with a particular goal to achieve. You need to set yourself a timeline to achieve your goals. This helps you in streamlining your investments accordingly. If you have a short-term goal (say achievable within three years), then you may not consider risky funds as your investment horizon is short. You cannot let the market volatility affect your investments, which, in turn, hampers your goals. Likewise, if your investment horizon is longer than five years, then you may consider investing in equity funds as they are known to offer excellent returns when the investment horizon is longer.
Also Read: Should You Diversify Your Portfolio With US-focused Funds?
3) Look at the history of the fund
You have to analyse the track record of the fund from the returns point of view. You should invest in a fund which has a track record of at least five years so that you have the past 3-year and 5-year data to analyse the fund’s performance. In particular, you have to look at the fund’s performance when a bearish trend grips the markets. A top-performing fund is not affected much by the market movements.
4) Fund expenses
Mutual fund houses levy investors with a small charge referred to as the expense ratio to manage their investments. This fee varies across fund plans. If you come across two different funds having a similar asset allocation and performance, then you may consider investing in that fund whose expense ratio is lower. Expense ratio directly impacts the returns, and hence, it is essential to choose the funds with lower expense ratio. However, it would help if you also looked at the returns offered by the fund. If higher returns justify the higher expense ratio, then you may stick with that fund.
You have to ensure that the fund you have chosen to invest in is serving your requirements. It is necessary to understand your requirements and the time needed and levels of risk that must be assumed to achieve them.
For any clarifications/feedback on the topic, please contact the writer at vineeth.nc@cleartax.in
Engineer by qualification, financial writer by choice. I am always open to learning new things.
