With the change in investment pattern of the modern day investors, mutual fund investments have proven to be the most efficient and convenient sources of investing. They provide multiple options of investing and they provide exposure to multiple markets at one go. Through mutual funds one can invest in Stock Markets, Real Estate, Bonds, Debentures, and Government Securities and so on. There is hardly any face of the market which is not left unexposed through Mutual Funds. Mutual Fund industry also realizes the opportunity which forces them to ensure transparency and convenience to the investor. The regulators are also doing a decent job to ensure such trend is continued. This change is well complemented by investment shift from the banks to mutual fund in the last decade or so.
But the question arises is where to invest when you have so many choices? Should I invest in funds which are listed in newspapers ads or should I follow what my banker says as he has more knowledge than me? What should I look for in a Mutual Fund before investing in it?
Every individual has specific investment requirement. For example, the investment requirement of a student would be different from a person who is about to retire. These requirements depend on factors like time at which the requirement arises, amount to be invested and the amount of risk one can take. The most difficult job is to match these requirements to the products available in the market. Here we focus on what parameters should be considered while selecting a mutual fund to ensure a right decision has been taken.
Decide the objective for investment
The first and the most basic step for investment decision is defining what an individual needs. The requirement can either be buying a car, planning for retirement or planning for a Kid’s education etc. This would help in deciding which type of mutual fund to invest in. For a young family with no kids, the best option would be investing in equity mutual funds as they have long term goals to achieve, which would give sufficient time for the equities to grow better. In case of a retired person investing in Debt Mutual Funds would be a better option which would ensure safety of the principal invested and it would not be very much affected by the market fluctuations.
You don’t drive looking at the rear view mirror
A very common mistake people make is judging a fund by its past returns. The returns data is easily accessible and becomes a very comfortable parameter to the investment decision. Financial advisors as well as mutual fund houses also use this data to push their product. But just like a book cannot be judged by its cover a mutual fund should not be judged by the past returns. There are several parameters to look into while deciding a mutual fund like their risk category, content quality, specific industry exposure and level of diversification. There may be a case where a specific mutual fund which have very good fundamentals in term of good quality contents, favorable risk to reward ratio and lower expense ratio may not have performed well in the past , but that does not make it a low performing fund for the longer run.
Do not put all eggs in one basket
Investing in mutual fund is subject to risk. Adding caution to the risk would ensure your hard earned money is intact in tough market phase. This calls for a proper diversification in the investments which would spread the risk by investing in different sectors like Large Cap Equity, Midcap Equity, Debt Markets and Commodities. By doing so one can be assured that during recessionary trend the investments are not yielding bad returns as some the sectors would perform well in such situations. In the past, Debt funds have shown high positive returns during the period of 2008-09 where the equity markets lost more than 50% which makes them an essential component in the investment mix.
High ratings does not make the fund good
Nowadays a lot of websites aims at providing essential information to facilitate investments decision. The fund details for each fund are easily available in a very convenient format which would help an investor to take their decision. To an extend these independent research houses helps in deciding the fund to be selected for investments, but their aspect of rating the mutual funds may be a misleading or a misguiding . The ratings are done by considering very limited parameters which may not be relevant as per the individual requirement. One should not blindly follow the ratings as they may rate some funds higher which might not suit their investment profile.
Mutual funds can become a tricky affair if proper examining & diligence of the funds are not performed. There are advisors and agencies ready to provide free advice to invest in mutual funds but the advice may have their objectives intact. It is always said for such advises that ‘Free Lunches are Always Expensive’. Investing is more complex that it looks as it requires a lot of discipline and patience.