Owing to the several benefits of mutual funds offered to investors, mutual fund investments have taken a special place in investors hearts. For investors, new and old, mutual funds are a wonderful and convenient way of investing your money. These investment vehicles have proved over time that they have the potential to generate significantly higher returns.
What is a mutual fund?
A mutual fund is an investment vehicle wherein an asset management company (AMC) pools the money of various investors and invests it in different securities such as bonds, stocks, money market instruments, etc. A fund manager professionally manages the pooled investment and invests it in a combination of equity mutual fund, debt funds, cash and cash equivalents, etc. according to your financial portfolio.
These fund managers are mutual fund experts holding an in-depth knowledge and understanding of the volatile markets. In return, the fund houses charge expense ratio i.e., the annual maintenance fee to manage your investments.
How to invest in mutual funds that best suit your needs?
- Investment goals
Before deciding to invest, you need to assess your goals, your risk appetite, and the tenure for which you desire to stay invested. An investment objective helps in determining the macro-level assortment of schemes. Your investment tenure has the potential to have an instrumental impact on your investment decisions.
- Performance of the scheme against a benchmark
A benchmark index of a specific mutual fund scheme is a standard against which its performance and stock allocation are compared. It guides the investment philosophy of the mutual fund. Hence, the asset allocation of a benchmark index should match with the investment objective of the scheme.
- Consistent returns
An ideal mutual fund scheme is the one that produces consistent, desirable, significantly high returns over a period of time and not just whirlwind gains. It should be able to provide consistent and decent returns in both bearish and bullish markets.
- Expense ratio
The expense ratio of a mutual fund scheme is an essential factor to consider as they can take away a huge chunk of your earnings. A reasonable expense ratio is anywhere between 0.5 to 1.5%. Anything above 1.5% is typically considered as a high expense ratio. As a thumb rule of investing in mutual funds, the higher the AUM (asset under management), the lower will be the expense ratio.
- Fund manager’s experience and expertise
The fund manager plays animportant role in the performance of your scheme. Although investing in mutual funds is a process-oriented approach, the fund manager has an ultimate say. As a result, their experience and view counts should be accounted as well.
With different types of mutual funds available to investors, you must remember that no single mutual fund scheme or a set of mutual fund schemes is suitable for everyone. Mutual funds do not follow the concept of one size fits all. A suitable mutual fund scheme is the one that aligns your financial objectives and goals, and risk appetite, and investment horizon among other factors. So, invest in mutual funds online that best complement your portfolio. Happy investing!