Due to lack of proper knowledge, just the term ‘Mutual Fund (MF)’ is enough to scare away most people. However, if you put your head into it, understanding MFs is really no rocket science after all. In fact, mutual fund investment is considered to be one of the most popular, easy and flexible ways to create a diversified investment portfolio.
What is a mutual fund?
Simply put, the money pooled in by a large number of investors is what makes up a MF. This collective money is then invested by professional fund manager(s), in various financial instruments, such as stocks, bonds, gold and other assets, in order to create better value for its investors. Using their expertise and investment management skills, the fund manager(s) operate the fund, in line with the scheme objective as specified in the offer document. Depending upon the investment amount, an investor owns a small but powerful portion of the MF known as unit. After deducting the applicable expenses, taxes, etc., the investor or the unit holder receives a share of gain (or loss) from the funds in proportion to the units owned.
What you need to keep in mind
1. Investment strategy: Please read the scheme-related offer document to understand the scheme’s investment objectives and match with your own expectations about capital appreciation as well as your risk appetite. It is critical to note that the value of your investments is subject to ups and downs of the market.
2. Fund house record: Though past performance is not a guarantee for future returns, a track record of consistent returns by a Fund house does indicate efficient processes and management practices. Hence, it is vital to check out the fund house, its history, track record across various schemes, etc.
3. Consistent past performance: Before selecting a MF scheme, ensure that it has performed consistently over the long term periods and not just over a short-term of six to 12 months. Go through the offer document to understand the goals of the specific fund, its expected composition of the underlying portfolio and compare it with similar funds in the market as well as against the industry benchmark.
4. Diversification: MFs are highly flexible, as they allow for diversification across stocks, industry sectors, and asset classes such as debt and equity. Thus, instead of risking everything by putting it all in one basket and incurring losses from a single bad investment, as an investor, you must use this opportunity to select mutual fund schemes to diversify your investments and spread your risks across asset classes, sectors etc.
What are the charges involved
As an investor, you should be aware of the various charges and taxes involved before investing in a MF. Investment management and advisory fees and other operating expenses can take a big bite out of your returns. You must scan through the offer document to know in detail about the applicable charges such as Exit Loads, Transaction Fees and Total Expense Ratio, etc. These charges are regulated by the Securities and Exchange Board of India (SEBI).
With the above factors in mind, you can now easily select and invest in a MF scheme that is just perfect for you and start reaping the benefits of good returns.