Mutual funds are evolving into India’s preferred investment choice finishing a close second to fixed deposits. Every year, increasing number of people are moving their hard earned savings towards Mutual fund investments in an effort to beat inflation and create wealth. While most people are aware of the fundamentals of a Mutual fund, there are some niggling questions which need answers.
What factors should I consider while selecting a Mutual Fund?
How do I review and monitor my existing portfolio?
What factors affect the performance or returns on Mutual Fund investments?
People with such questions either resort to friends and/or family for answers or simply follow the herd and opt for the more popular schemes. This is a dangerous ploy since one wrong decision can lead to potential financial losses. Hence, it is imperative that investors seek clarity before investing their hard earned money. Here are five pointers to help such investors invest in Mutual Funds:
Why are you investing? Is it for your retirement? Or Children’s education? Or buying a house? Regardless of the reasons, having an investment goal is the first step on the ladder of a successful investment cycle. It gives the process of investment sanity and enhances focus of your efforts. Also, it protects you against mindlessly falling for the next popular investment option.
Money is not the goal. Money has no value. The value comes from the dreams that money helps achieve. - Robert Kiyosaki – Author of ‘Rich Dad Poor Dad’
Once you align a dream or a goal with your financial plan, you will be more focused and determined to make it a success. Also, it will help you align your investment timelines to the duration left for your goals. In a market which is largely dependent of investor sentiment, having a practical approach usually begets good financial decisions.
Once you have set your financial goals and time horizons, you need to spend some time assessing the amount of risk you are willing to take. Remember, all market investments are subject to some amount of risk. Additionally, risks are directly proportional to returns, meaning higher the risk – higher the return and vice-versa. Understanding your risk preference will help you narrow down to the asset class that you might want to consider.
For example, if you are comfortable with a slightly higher risk, then you might want to consider equity oriented funds. Investors with relatively lesser risk preference usually opt for balanced or diversified funds and those with low risk preference choose debt funds.
Once you are clear about the asset class you want to invest in, then you can start looking at various schemes investing in the specific asset class.
Investing in the mutual funds needs a good understanding of what the scheme offers. This involves time spent on studying the Scheme Information Document (SID), published by all funds. Look at the investment objective, current portfolio and historical as well as annualized returns in both bullish and bearish market cycles.
The fund manager is of utmost importance since he/ she ensures that the fund performs well and takes critical decisions about the allocation of funds in the scheme. Go through his/ her performance record to see how the funds managed by him/ her have fared in the past.
Ensure that you are in sync with the scheme’s approach to earning returns before investing.
Most people argue that the idea of investment is to generate passive income so that they don’t have to spend more time monitoring it. This idea stems from the age-old habit of investing in bank fixed deposits. However, unlike FDs, market based investments like mutual funds require you to regularly monitor the performance of the funds that you are invested in.
This is beneficial in more ways than one. The market is a highly volatile place with prices of assets fluctuating based on a wide range of parameters. As an investor, it is impossible to keep track of all these parameters and hence reviewing and monitoring your portfolio is important. Each fund has a benchmark calculated by analysts and experts from the fund house. As long as the fund’s performance is comparable to the benchmark, your investment will generate returns around the anticipated mark. However, if you find that certain schemes are underperforming, then you can choose to exit the fund and invest in more promising schemes within the same asset class.
Performance of a mutual fund investment depends on a wide array of factors. While keeping a tab on each of them is not possible, understanding their impact can help you make informed decisions before and after investing. Some such factors are:
Performance of the underlying assets – A mutual fund invests in assets – be it equity or debt – and the performance of the fund is primarily affected by the performance of these underlying assets. So, if you have invested in equity oriented funds, then a rise in the share prices will result in a rise of the NAV of the scheme and vice-versa. The additional benefit is that since a fund invests in multiple shares across a sector and/or multiple sectors, the impact of a fall in the asset prices is lesser as compared to an investment in the asset itself.
Performance of the sector/s – Some funds are focused on certain sectors. The performance of these funds is affected by the rise or fall of the specific sectors. So, if you have invested in a scheme that invests primarily in Energy stocks, then a drop in the prices of crude oil can have a negative impact on the NAV of the scheme. Or if you have invested in Index funds, which mirror the performance of a market index, then the NAV moves with the movement of the index.
Fees and charges –Apart from the performance of the assets, the returns from your mutual fund investment also depend on the applicable fees and charges charged by the fund house for managing your funds. This is known as the scheme’s Expense Ratio which is mentioned in the Scheme Information Document (SID). This fee is deducted from the amount invested by you.
Overall performance of the fund –Any fund manager can work wonders with the funds, provided investors stay invested and redemption of units don’t force him/ her to sell assets at a time when the market is down. On the other hand, if redemption requests are lesser, then the fund manager has more opportunities to invest in assets which can generate good returns. Avoid funds which have a high rate of redemption.
Macro-economic factors – The macro-economic factors of a country play a huge role in ascertaining the future of an economy and the financial markets. Some of these factors include population, global market movement, inflation, etc. Not much can be done about these factors but being aware can help make the right decisions when the time arises.
Investment in mutual funds can help you diversify your investments with ease and generate good returns. Keeping these factors in mind will help you pick the right schemes and manage your investments better. So, pull up your socks and start investing NOW!