Mutual funds can be your pick if you wish to benefit from stock market and still want to stay away from actual share trading and instead would like to get the funds managed by a professional and experienced fund manager. Mutual funds can be aligned to your timeline and time horizon of financial goals. Instead of investing in fixed deposits or insurance unnecessarily for long term, mutual funds would be a best choice which gives out inflation adjusted returns and outperforming performance as compared to those conventional investment instruments.
Mutual funds have become a very popular source of investment for most investors. They come in different variants, allow affordable investments through Systematic Investment Plan (SIPs), help in saving taxes and provide great returns. The inherent risk is diversified as mutual fund schemes invest in a variety of stocks and shares. This is what makes mutual funds ideal. They provide attractive returns at lower risks compared to the share market.
When we talk about long term investments, Mutual funds are a good option. Whether you are planning to create an education fund for your child, buy a house, plan for your retirement or accumulate wealth, a mutual fund is your solution.
Do you know how many mutual fund schemes are available in the market? Too many to count! As such, it becomes difficult for investors to make a choice. To make your work easier, here are some essentials to look for to suit long term goals.
Essentially this is just general pointers list, however requirements may vary from one investor to another.
Considerations for Choosing A Mutual Fund
- Allocation Of Assets
As the very first step you need to understand the type of portfolio you want for your mutual fund investment. The portfolio of a fund is termed as asset allocation. An ideal and balanced asset allocation will strike a decent act by managing the risk components along with maintaining security with money market instruments.
The key consideration of asset allocation is that you need to have a proper mix of both high risk and low-risk components. As per experts, the allocation of secure components should match the age of the investor.
For instance, at an age of 40, you need 40% allocation in secure instruments. This shows that with age your investment should comprise more secure components. On the other hand younger, you are, you need to invest more in equity.
Read here: Points to consider while investing in Mutual Funds
- Short Listing Fund Types
Now that you have an idea of portfolio or asset allocation, depending on your age and risk appetite you need to make a shortlist of funds that perfectly match your desired portfolio and return.
Now you need to compare among a lot of funds based on their performance, approach of investment and overall reputation. You can get the details about the year on year return of any fund through the prospectus of the fund and other industry publications.
More than just the last annualized return you need to target metrics like return achieved over the benchmark and consistency of performance.
As for choosing a fund, you need to consider your financial objectives first of all. Is it your retirement or old age planning for which you are investing in Mutual Funds or it is for luxury spendings? Whatever be the objective, to gain more monetary growth you need to have bigger risks.
But obviously, there is a limit of taking risks as mutual funds are addressed for population willing to ride growth while enjoying the security of their Money through diversification and few money market instruments.
- Making The Final Choice
Now that you have made a shortlist of funds as per the considerations mentioned here above, you finally need to pick a fund that suits your investment goal.
First of all, you need to check its past history starting from the date of inception. Check the holding pattern of the fund besides checking funds performance online.
You can also look for top funds in your preferred asset class on the basis of your financial objectives, and risk appetite.
As I mentioned earlier, when checking performance more than just considering its latest return focus on the return offered by them in comparison to the benchmark. Lastly, always study the fund manager profiles to gain confidence in the crucial expertise needed to manage such funds.
- Understanding How Diversification Helps
Wherever there is equity there is potential risk and chances of growth. So, Mutual Funds also have their share of risks and opportunities. But in spite of the risk involved majority of mutual funds offer good return year after year. How is this possible?
Well, Mutual Funds follow the aged principle of not keeping all eggs in one basket. So, by diversifying the assets across sectors it not only minimizes the risk but also ensures growth.
For instance, if your investment portion in telecom sector stocks face loses, the engineering or banking sector stocks within the same time frame can fetch you a good return. In between some stocks will not give any substantial gain or loss. Thus the diversification helps in managing risk and securing growth for the long term.