Before doing anything new, everyone faces some kind of perplexity, should I try this or should I drop this idea? What if I fail or results don’t work out in my favor? The fear of losing stop people from coming out of their comfort zone.
But, that’s how change takes place. Even a 7 year old child make efforts to ride a bicycle, despite knowing that he has a strong probability to fall. So, if a child can overcome his fear, then why can’t we?
In today’s time, every mature citizen’s fear is ‘Should I invest in mutual funds or not’? ‘Is it safe’? ‘Will my money double up, or loses would fall into my pocket’?
All these doubts act as impediment in growth. But in reality, investment in mutual funds is not just a good idea but a smart step too. However, even while taking a medicine prescribed by a highly qualified doctor, patients keep certain things in mind, similarly investing in mutual funds require alertness and watchfulness.
There are five things one has to keep in mind before proceeding ahead with the investments:
1. To know what a Mutual fund is?
First and foremost, get clear with the concept of mutual funds. There are more than 7,000 mutual funds, each one has a distinct aim and purpose. Your financial goals and the investment horizon would decide the kind of investment you should buy. As a rule, you should invest in a safer avenue like debt mutual funds to meet your short-term goals and bet on equity mutual funds to take care of your long-term goals.
Equity funds are risky, but they have the potential to offer you superior returns over a long period. However, they are also volatile in the short-term, that is why you can’t invest the money needed for a short-term goal. So, for a near-term goal that is a few months away, you should ideally park your money in liquid or ultra short-term funds. For a slightly longer tenure of, say, a year or two, you can either bet on short-term debt funds or dynamic debt funds.
2. Expense Ratio of Mutual funds
To manage a fund, a fund house incurs certain expenses which typically include management fee, transaction costs, brokerage costs and operating expenses and in case of regular funds they also include commissions paid to the distributors. A sum of all these expenses as a percentage of total assets under management (AUM) is the expense ratio. You can easily aim for higher returns if your investment expenses are low. In simple and profitable terms, we can say, lower your investment expenses are, higher your returns will be. If you are looking for funds that charge low fees, then make research your mate.
3. How to unearth the Best Mutual funds
Best Mutual Funds are selected based on certain parameters that are both Qualitative and Quantitative in nature. This helps in selecting funds that have not only performed better in past but also have good prospects in the future. Once you are certain with which mutual fund to go with, then it becomes easier to discover those funds which have a proven track record.
4. The Last Phase- Fund Selection
The fund selection should be based on your objectives, time horizon, risk appetite which tells you what asset allocation and categories you should look for and then select the one which suits best in the categories laid down For Example – If you are planning to invest your retirement money, then it is clear you won’t be touching or using that amount for the next twenty years. So, in that case, the equity fund will be suitable for you. But, if the situation is different and within a few years you are retiring than equity fund can’t be your companion. As a balanced fund would be the need of the hour.
In a nutshell, we can say, mutual funds are a great platform for investing, provided you are aware of your goals, purpose and well equipped with all the requisite details.