Checklist for investing in Mutual Funds
Mutual Funds may seem daunting to many as they deem it complicated and risky. People with an aversion towards risk generally usually prefer traditional methods of investment like savings. However, the returns from savings are not sufficient enough to meet the rising inflation. So, any investment made should guarantee higher returns so that your standard of living does not take a hit. While exercising caution is a good thing often, unless you take effort to grow your money, you will likely be in a financial mess. Mutual funds are one of the easiest methods to raise your funds.
A mutual fund is formed when a fund house pools from various investors with a common objective. The fund manager manages the pooled funds by strategically investing in multiple assets to grow your funds. The fund manager avails the assistance of fund analysts in his tax. Typically, the fund house or Asset Management company charges a fee called the expense ratio. This fee is charged as an annual maintenance fee for managing the funds.
Investing in Mutual funds depends on a lot of factors. What is your financial goal? What is your risk-taking capacity? How long are you planning to invest? Are you planning to build your retirement corpus based on this? We are here to help you find solutions for these answers.
1. Financial Goal
Unless you are sure about your financial goals, hitting on the right mutual fund is not possible. It may be building a surplus retirement fund or reaching a milestone in savings when you hit a certain age. Once, you are sure about your financial goals; you can sit back, relax, and pick the right fund to aid your goal. The entire point is to have a good return decent enough to ensure a high standard of living. Pick the fund most suited to your financial goals, whether it is short term or long term.
2. Risk Appetite
Investment in mutual funds undeniably involves some amount of risk. When you are investing in equity mutual funds, the fund’s performance depends on various market conditions. One way to gauge the fund’s risk level is to compare the returns of the fund every year. A considerable difference indicates volatility and hence more risk associated with the fund. Based on your risk appetite, you can choose the most appropriate fund.
3. Expense Ratio
The Fund house charges a fee called the expense ratio, which is the annual maintenance fee for managing the funds. It goes towards the operational expense involved in managing your funds. You must invest in companies that have a low expense ratio. A lower expense ratio would ensure most of your money would remain in the fund. An expense ratio between 0.5 to 0.75% is considered ideal. Fund houses that charge an expense ratio of more than 1.5% are considered high.
4. Diversify your funds
Remember, investing in mutual funds is not just about putting all eggs in one basket. Do not invest your entire money in one fund. Diversify and expand your portfolio by spreading your funds across several sectors. A well-diversified portfolio involves investment in debts, equities, and cash equivalents.