The need to invest money in the most profitable and efficient manner is the first rule of any kind of investment. For a first-time investor, it is especially crucial to understand the A-Z of all kinds of investments. A beginner must understand before taking that step, because a single turn can make or break you.
To this end, investing in mutual funds has many easy advantages. The two key ones being are:
- it will help you stay invested in the markets.
- give you breathing space from constantly tracking your investment portfolio.
There are many types of mutual funds that are broadly categorised into index mutual funds, low-risk mutual funds, and high-risk mutual funds. For those looking to invest in mutual funds, it is imperative to consider a variety of factors. These factors will help them to decide on the kind of mutual fund scheme that you wish to opt for. Very often, first-time investors opt for the fund that seems to be doing the best in the market.
However, it isn’t necessary that a particular fund will yield the best results for them.
An investor’s understanding of risk and the purpose behind him or her making that investment are just some of the many factors that need to be considered before making that investment. Here is a guide on how mutual funds investment works. The guide have been drawn up to help both seasoned and first-time investors make that smart investment.
Understanding the Risks Involved in selecting the Mutual Funds
Before making any kind of investment, it is imperative that an investor understands the risks. The risk that are associated with the type of investment that he or she is opting for.
For instance, investors who usually are looking to make a long-term goal. And for which he or she would need to make an investment for a period of at least five years. They should ideally choose to go with an equity mutual fund. However, this does come with a fair share of risks. Since this depends on the market performance for the same number of years.
Equity-oriented balanced schemes or large cap mutual funds schemes usually have the least amount of risk associated with it. While mid-cap and small-cap schemes typically accrue a higher percentage of risk.
Diversify while selecting mutual funds
A word of great caution for all investors is that they should never place all their eggs in one basket. In economic terms, an investor should invest their money across sectors and market capitalizations in the case of equity mutual funds.
Unlike fixed deposits, mutual funds are handled by a fund manager. They plays key role in determining the performance of the mutual fund schemes that are opted for. As a result, it is paramount that an investor does research on the fund manager they select to take care of their proceedings.
This would include finding out information about the fund manager’s past record. This includes the number of years he or she has worked in this role, his or her past records and success rates. The greater a fund manager’s success rate, the more reliable he or she probably is, in assuring effective fund management. Hence on how to select mutual funds, the role of the fund manager is imperative
Most mutual fund schemes, charge a fee which consists of the expense ratio, entry load and exit load. An investor should take care and check if these are in alignment with what he or she expects to spend. An entry load fee is the one that is typically paid out of a mutual fund investment. It is paid at the initial stage itself when an investor buys units in the fund.
As mentioned most mutual funds don’t charge entry load. An exit load fee is usually charged if an investor redeems their units before a particular period. The exit load period varies depending on the type of mutual fund and the AMC.
This entails a bit of research that an investor needs to carry out on the type of mutual fund that he or she is planning to go by. Those investing in a particular kind of mutual fund should check to see how it has performed over time, in various market cycles.
An important thing to take note is whether the scheme has offered consistent and stable returns to its investors in the past. It is more important than whether it offered sky-high returns to just a few of its investors at times. Simply put, before you select a mutual fund scheme, a smart investor should weigh its stability over its highest returns offered, when he or she is evaluating the same.
To sum up, an investor needs to assess his or her goals. Then gauge the kind of risk they are comfortable with and run an intense check on both the performance of the mutual fund scheme they are looking to invest in, as well as the fund manager who will be handling it for them.
They should also take stock of any loads that come with the selected mutual fund scheme and check for its turnover ratio. Most importantly, if they are making multiple investments, it is always a safer bet to invest in two different types of mutual fund schemes.
These are just a few of the many factors that an investor needs to check, before making an investment. With these factors in mind, investors can benefit from growth as per their needs.