Now that you have decided to invest in a mutual fund, the next important step is to select a scheme or set of schemes that can help you meet your goals. Here we are providing you six points to consider before you decide on a particular mutual fund scheme:
1. Identify your goal: Read and research as much as you can before zeroing in on a particular mutual fund scheme. Fund performance matters, but simply picking up last year’s top performing funds is not the right approach because these are ever-changing set. Before arriving at a decision it is necessary to consider key micro and macro economic trends, and to align your investment objectives with those of the scheme. For equity investments, it is advisable to remain invested for a long period.
2. Hidden charges and fees: Every investment comes with its own set of expenses – like transaction cost, advisory fees, sales and purchase fees and the fund manager’s expenses. Based on this information, one can calculate the expected return on investment. Ensure that your fund house is efficient and does not impose unreasonable charges/ barriers.
3. Risk-reward ratio: Know your risk appetite before investment. It’s better to invest amount as per your risk appetite (conservative, assertive, aggressive, etc.). Remember, if you are prepared to take more risks, the scheme should have the potential to provide better returns over the longer period.
4. Tax rebate: Just like stocks and bonds, mutual funds’ tax liabilities are based on short-term and long-term capital gains. In fact, as an investor, you should consider the ‘post-tax returns’ while calculating the absolute returns from a scheme.
Consider these questions:
* Is the invested amount tax exempted?
* Is there a lock-in period to avail the said tax benefit?
* Are the returns tax exempted? What about the dividends and payouts?
5. Evaluate long-term performance: The best metric to evaluate a scheme is its long-term performance. Along with the average rate of return, see if the scheme has been able to meet its investment objectives. Evaluate its long-term performance vis-a-vis similar funds in the market. Also consider key portfolio parameters to ascertain if the fund is taking undue risks, etc.
6. Fund manager’s capabilities and investment processes: The performance of a mutual fund scheme is dependent upon the experience and expertise of the fund manager and the processes it adheres to while managing your funds. Before handing over your hard-earned money to them, learn about their credentials and their abilities to achieve the scheme objectives even in challenging market conditions.