Mutual fund may be called the easiest way of savings as well as wealth creation, mainly due to less paperwork and minimum investment amount starting as low as Rs. 100. As a result investors turn to explore this option as much as possible, but in turn end up in investing in inappropriate fund. Let us say if an objective if for creation of emergency fund and the savings are invested in ELSS scheme, the objective will fail miserably due to lock in status. Mutual fund are briefly categorized in to equity, debt and hybrid fund and further sub categorized in accordance but not limited to asset class in which the fund is invested or tax treatment, investment horizon etc. This alone creates a humongous variety of funds to choose from, leaving investors overwhelmed. Therefore in order to know the best from the different types of mutual fund follow the below 5 tips to invest.
- Keeping your head & objective clear. A very important tip, as the same defines your investment option. This involves answering three simple questions: 1. How much you want to invest? 2. How long do you want to funds kept invested? What is your risk appetite? This will narrow down the categories and help you achieve your objective appropriately. For instance say if you want higher returns and ready to keep the fund lying for more than 5 years, ELSS scheme or growth fund is the option for you. If you are going to require funds in immediate future, liquid fund or ultra short term debt fund is the appropriate option for you.
- Ignore NAV, focus on growth. Evaluating a fund on the basis of its current NAV is futile. Instead what must be looked at is the history of its performance and future prospects of the fund. To simplify let us say if you have the option to buy 20 units of fund A with NAV of Rs. 100 (20×100 = 2000) or 200 units of fund B with NAV of Rs. 10, the outflow remains identical in both cases (200×10 = 2000). Thus in both the cases growth is the aspect which should determine your result because fund A might gives you 10 % return and fund B might fetch 12% return.
- Risk analysis. A very crucial point to think before investing, as it may make or break a dream. As said earlier there are three types of fund equity, debt or hybrid. Equity fund invests heavily in shares of the companies, thus exposing itself to market risk and volatility. Thus equity fund possess higher risk albeit higher returns to cherish. Debt fund primarily invests in debentures or bonds issued by corporate, which carry low risk and guaranteed returns at predetermined rates. While hybrid funds are combination of both equity and debt instruments. Therefore choosing the right combination of risk-return shall determine the correct mutual fund.
- Long term is the key to success. Rome wasn’t built in one night, similarly your dreams won’t come true in one night. For wealth creation equity oriented mutual fund are always helpful, provided they are maintained for long run. Equity market is always volatile, but history suggests, market performs outstandingly well with investment period of 5 years or more. Therefore focus must be to invest in a systematic way and for a longer period in order to enjoy the ultimate benefits. It is prudent to keep liquidity, hence investment in debt or liquid funds is also essential, in order to cater emergencies without disrupting the long term goal.
- Periodic Evaluation. Often ignored aspect in mutual fund investment, is lack of performance evaluation. It is necessary to check whether the funds are performing according to expectation or not. If not then eradicating such non-performers and replacing them or reallocating them is necessary. However one must be careful of over evaluation of any fund, as it may result in unnecessary losses. Therefore checking performance history of fund and studying the market conditions may give better idea whether change is required or not.
Mutual fund investment is a new generation investment option; hence few know the details about it. In addition to that the number of products is on continuous rise, owing to rise in different requirements. This has created a huge net of different mutual funds, creating confusion among investors. Therefore it is necessary to analyze and take help of above tips to make the investment journey fruitful.
To know more about the different types of mutual funds and how to invest in them click on the below mentioned link