How to Choose the Best Mutual Fund?
Investing in mutual funds can seem to be exciting. It sounds so good to be able to earn money without any financial stress, but it comes with challenges, whether you are an experienced investor or a Newbee! Knocking into the investment world and knowing some primary considerations can help you make wise decisions. Mutual funds have become a trend for everyone: students, homemakers, and retirees. Everyone is investing in mutual funds because they provide good returns, but some things come along and need to be considered. Different types of mutual funds are designed for different people with various financial goals. Let's have a look at some of the factors that will help you choose the best mutual fund.
Factors to Consider Before Choosing the Best Mutual Fund
The criteria to select the best mutual fund can vary depending on the risks associated with it and our financial goals. Therefore, we should consider these following factors before choosing any mutual fund:
- Identifying Goals
Identifying goals is one of the initial steps before entering the world of mutual funds. Picture yourself in a situation where you have two paths but have no clue where to go. You choose a random path and realise this is not where you wanted to be; all your efforts, time and money are in vain. Similarly, if you don’t identify your goals and requirements, you can end up making the wrong investment decision. Before investing in any fund, you must determine your financial goals. Are you looking for long-term capital gains or short-term gains? What is your aim for investing in a mutual fund? Is it your retirement plan or wedding plan? Identifying your goal can help you choose the right investment plan for higher returns.
- Fund Type
The primary goal of growth funds is capital gain. Long-term capital appreciation can be the right path if you can hold investments long and have a high-risk tolerance. Therefore, these funds have a high percentage of assets and are risky. They offer higher returns with time, depending on the types of mutual funds.
- Risk Tolerance
Risk tolerance is another factor that should be considered before investing in any mutual funds. Mutual funds are subject to market risks and do not guarantee a specific amount of return. It is essential to know your risk-taking capacity. It is necessary to assess for how long you can hold the investment. Let's say you have invested in a mutual fund with a five-year tenure. Your objective to invest in a mutual fund is a marriage you are planning in two years and don’t have holding capacity. In this case, you cannot withdraw your holdings before the maturity of your investment. Thus, this investment plan may turn out to be a wrong decision.
- Fees
Mutual funds charge management fees to monitor and manage your funds. Before investing in any Mutual fund or tieing up with any AMC, it is crucial to understand different types of charges associated with other investments, like
- Expense Ratio- fees charged annually to cover operational charges.
- Management Fees- fees charged for fund manager to monitor and manage funds
- 12b-1 Fees - fees charged for marketing and shareholder services
- Front-End Load- fees paid at the time of purchasing shares.
- Back-End Load- fees paid at the time of selling shares
- Redemption Fee- fees charged after selling the stocks within a particular period.
- Exchange Fee- fees for exchanging shares in the same family.
- Account Fees- fees charged for account maintenance.
- Short-Term Trading Fee - fees charged to sell funds.
- Management Type
Choose if you want to invest in activity or passively managed funds. Managers research and analyse the markets and economic conditions when making an investment portfolio. These funds often have high fees but can also give higher returns.
On the other hand, index funds or passively managed funds track the performance of different market indexes, giving returns similar to the market index. These funds have low risk and fees compared to actively managed funds.
- Evaluating Past Records of AMCs
Before investing in any mutual fund or with any AMCs, it is essential to research the records of the funds and the company. We always have opinions or look at Google reviews before visiting a new restaurant or a movie. Why? To avoid wasting our money and time! So, we make sure to take opinions and note records. Give it a thought! We take views before investing a small amount of Rs.200. Then how can we make big decisions like investments without seeing their records? Ensure you always look at the company's record to know how their investment decisions have worked in their favour.
Let's Sum up!
Investments are big decisions in your life that may affect your financial stability; thus, it is essential to ensure you make investment decisions that do not harm your future. You surely must have heard ‘precaution is better than cure’. Similarly, taking necessary precautions before investing in mutual funds is always essential. There are a few factors to consider when choosing a mutual fund. Start by asking yourself your aim in the first place. Then, understand your financial situation by assessing your risk-taking and investment-holding capacity, choose a mutual fund company with low fees, and compare its performance with that of other AMCs. And there you go, you are all set to explore financial independence.