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A lot of people shy away from investing for several reasons – be it lack of proper knowledge, or not having sufficient time to track the markets, or even not having enough savings to begin with investments in the first place. Also, a few investors hope to invest just in tax-saving investments as they wish to gain tax waiver while others wish for abundant liquidity in their investments. There is a single solution for all these needs, enter mutual funds.
What is a mutal fund?
Mutual funds are investment vehicles wherein an asset management company (AMC) pools the money of various investors and invests it in several securities such as equities, fixed-income instruments, money market instruments, etc.
Let’s understand how to choose the right mutual fund for your portfolio:
- Compare your scheme’s performance against the benchmark
It’s a good practice to compare your fund’s performance against a benchmark. However, while comparing, ensure that you use an appropriate and fair benchmark. In short, it must be an apple to apple comparison. Using the wrong yardstick couldgive misleading data that can hamper your returns on mutual fund investments. - Understand your fund’s expense ratio
Expense ratio is the annual fee charged by the AMC (asset management company) or the fund house for managing your investments. As per the Securities and Exchange Board of India (SEBI), fund houses are not allowed to charge more than 2.5% as the total expense ratio (TER) . TERis levied out of the returns on mutual fund investments. So, the higher the TER of a fund, the lower would be your take-home gains. So, always check for the expense ratio before deciding to invest in mutual funds online. - Compare fund history
A fund’s real worth is assessed only during unfavourable market conditions, and a fund history is often a testament to that. Look for schemes that have a fund history for a longer duration, say 5-10 years. Compare the fund history across various business cycles, time intervals, and market conditions. - Evaluate risk-adjusted returns
Instead of taking into account just the annualised returns of the fund, consider risk-adjusted returns. As per risk-return trade-off, a higher level of risk should be compensated with a significant degree of profits. The risk can be calculated with SIP Calculator with the help of a standard deviation.
Benefits of mutual funds
You can invest in mutual funds to create a diversified investment portfolio that helps you to meet your financial needs, be it short-term or long-term. Also take into account the risks associated with investing in those funds and avoid under or over-allocation in a particular asset class such as debt funds, equity funds, etc.
Mutual funds also provide asset allocation funds that could mirror your life-stage and gradually reduce the exposure to volatile investment options and move to more stable types of investment as you grow old. You can consider these funds if you wish to leave the rebalancing of your asset allocation of the fund to the fund manager.
What’s more, you can leverage mutual fund investments to impart financial discipline and meet your financial objectives and aspirations in a timely structured and timely manner. Irrespective of the types of mutual funds chosen, ensure that your investments are aligned with your investment goals, investment tenure and risk profile. Do not shy to take advice from experts, if the need arise. These advisors have a piece of in-depth knowledge and expertise about the volatilities of the market. Happy investing!
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