11 Jan 2018

e-Khaliyan

5 THUMB RULE BEFORE INVESTING IN MUTUAL FUNDS

Some investors may consider looking at the star ratings given by various research agencies.
These star ratings can be one of the factors to look at, but there are many other parameters that one should consider before beginning their mutual funds journey.
⇒ Fund type
This is the most important condition to consider.
  • Your goals define your investment time frame which in turn helps select the right asset class like equity, debt or gold.
  • Every asset class reacts differently to market conditions and you should be aware of that.
  • If you want to park money in the fund for a longer term and are willing to bear a fair amount of risk and volatility, opt for equity-oriented funds.
  • These types of funds typically hold a high percentage of their assets in stocks, and are therefore considered volatile in nature.
  • They also carry the potential for a large reward over time.
  • Conversely, if you need regular income, you should invest in an income fund These schemes generally invest in fixed income securities such as bonds and corporate debentures.
When an investor has a longer-term need, but is unwilling or unable to assume substantial risk, a balanced fund, which invests in both stocks and bonds, may be the best alternative.
⇒ Expense ratio
Every fund has an expense ratio
  • which takes into account all fund management and administration-related expenses.
  • This is simply the total percentage of fund assets that are being charged to cover fund expenses.
Even though the Securities and Exchange Board of India (SEBI) puts a cap on this amount, the higher the ratio, the lower the investor’s return will be at the end of the year.
⇒ Loads and charges
Mutual funds have certain charges, also known as loads.
  • Since SEBI has made it mandatory not to charge an entry load, you cannot be charged for buying mutual funds.
An exit load fee is charged when an investor sells his or her investment, usually prior to a set time period, such as within 400 days from purchase.
⇒ Fund manager experience
As with all financial investments, investors should conduct thorough research on a funds past performance and the manager experience and expertise.
  • This process will give the you insight into how the fund manager has performed under certain conditions, as well as what has been the trend in terms of turnover and return.
But past performance is generally not a good indicator of future performance, so use it more to understand the fund manager’s approach rather than the success of the fund.
⇒ Asset under management (AUM)
AUM is the total amount invested in a particular scheme by all investors.
  • The AUM is different for debt and equity schemes . In equity, a comfortable asset size can be hundreds of crores, whereas in debt schemes, it is in thousands of crores as the investment value is higher in debt funds.
Most mutual funds’ total AUM are invested in debt funds. A higher AUM offers a cushion to investors in case of huge redemptions or a market crash, and may lead to a reduction in the scheme’s expense ratio.

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Anonymous
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19 March 2018 at 09:44 delete

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