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31 October, 2020 02:14 IST
Financial Planning
10 things you need to know about Mutual Funds
Source: IRIS (25-JAN-16)

Over the last two decades or so, mutual funds have become increasingly popular as a means of investment. We can also understand mutual fund as an investment vehicle, made up of a pool of funds from various investors.

1. What is it about?

To know more about this investment scheme, let us try to know the basics of how to begin investing in mutual funds. The following tips will be very informative and descriptive to help you better understand and get a detailed view of the same.

2. Easy Diversification:

Most mutual funds need a modest minimum investment, ranging from a few hundred to a few thousand rupees. This thereby enables the investors to create a diversified portfolio in a much cheaper way than they could do on their own.

3. Variety of Equity funds:

Some categories of the various kinds of funds include growth funds, sector funds and index funds. Growth funds buy shares of burgeoning companies, whereas sector funds buy shares of companies in a  particular sector, like technology and health care. Index funds are the ones that buy shares of every stock in a particular index.

4. Many different flavors available for bond funds:

There are funds available for everyone's taste. If you want to park your money for less than a month, you can invest in liquid funds, if you want to invest for less than 6 months, you can choose ultra short term funds. If you want to invest for more than a year, you can choose short term funds. Like this based on your time duration, you can choose a suitable debt fund.

5. Consider the risks involved in achieving returns:

Before you buy a fund, you must look at the risks involved in its investments. Can you imagine yourself bearing big market risks for the stake of higher returns? If you do not have such risk-taking ability, it is always better to stick to funds with low-risks involved.

6. Low expenses are vital:

Mutual funds charge a percentage of the total assets in order to cover their expenses and make profits. Expenses may not sound considerable at not more than a few percentage points per year. However, they still tend to create a serious performance drag over time.

7. Taxes-a big bite out of performance:

Not selling your fund shares, might also end you stuck up with a big bite of tax. Investors often surprise to know that they owe taxes, which include for both capital gains and dividends.

8. Do not hunt for the winners:

While choosing a mutual fund, always look for consistent and long-term results. One should remember that funds ranking very high over a period rarely finish on top in the long duration.

9. Make diversified equity funds, a foundation for your portfolio:

A Diversified equity fund invests across in different sectors. Diversified equity funds will give superior risk adjusted returns over all other investment asset classes in the long term. In any  long term portfolio, it is advisable to keep equity funds as a foundation.

10. Do not hurry to throw away a fund:

Any fund, at present or in future, may have an evil hour. Even though you might be inclined towards selling a fund, it is important to first check whether or not, it has faltered comparable funds for over two years. If no, then get on to your seat tight. However, if the earnings have been lacking consistently, then it is time one should better move on.

The above-stated points form the underlying guidelines, which an investor must be through with before investing in mutual funds. It is always beneficial to have a good understanding of the same beforehand, rather than getting into trouble later.

(Ramalingam. K an MBA (Finance) and certified financial planner. He is the director & chief financial planner of holistic investment planners)

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