Investing in mutual funds can be very confusing due to lots of options available in the market and to some extent lack of information on investor’s part. You have to be a vigilant and quick learner when it comes to investing in the stock market. There are plenty of advisors, suggestion holders, experience holders, there is a huge variety of stocks and funds; there are options in the mode of investment. There is abundance in all forms, you just need to be precise in order to reap the best benefits of them all.
Warren Buffet is the Godfather of investing. Going with his experience and understanding of the domain, people have made fortunes, needless to mention what he himself has made. The man has followed two basic principals while selecting the investment instrument (mostly mutual funds) on a broader perspective. These two factors are the long-term value of the company and understanding of the business and business model.
According to Warren Buffet, look for these two things when you go for investing. He analyses the funds based on these two parameters and decides whether to invest in them or not.
THE LONG-TERM VALUE OF THE COMPANY
The long-term value of the company means analyzing if the given company will hold its value in the coming 10-20 years (thinking about a long-term investment). If the business is capable of holding its competitive edge over others and sustain the competition, then it is a good buy otherwise, with the decline of company’s trend chart, the share price will also fall. One example to explain this is of farmland. No smart investor buys farmland based on the weather forecast for the coming year. There are a lot of other elements which need to be factored in.
The basic principals which stand true to investments today will hold good 50-60 years down the line as well. Hence, it is important to evaluate the funds on these factors.
UNDERSTANDING THE BUSINESS
The next important thing is to understand the business you are investing in. Buffet says that if you have an understanding of the business and the business model of the company you are planning to invest in, you will be able to make better decisions. Also, it is important that you learn how to value businesses and what parameters to consider while bench-marking their performance.
While you are still scrutinizing which fund to go for, you must consider the factor if the business lies within your perimeter of investment.
It may not be an easy process to evaluate funds on these and more parameters but since you are investing your money, a little extra effort now will pay you back later on.