What do we do when we think of purchasing big ticket items like property or car? Do we rush out and buy it? Not really. We analyze, we compare, we do bit of research, we hire agents who help in searching the best and once we are satisfied, we make the purchase. So, why this process be any different when thinking of investing in mutual funds?
Everytime we are working on a suggestive portfolio, the clients come and ask us – How to find the right mutual fund? How will you assess the wrong and right mutual fund? If there is an option, what parameters will help in choosing the right mutual fund investment?
When you’re considering buying a mutual fund, you have to dig down a little bit deep to examine the type of holdings that are powering it, how much it costs, which agent can help you drive it, his past performances etc. Sometimes investors make the mistake of selecting mutual funds only on the basis of performance and that too just the recent performance. That should be avoided. There are also some investors who consider only the star ratings given by various research agencies. These ratings can be one of the factors to look at, but there are many other parameters that one should look into before finalising a mutual fund portfolio. But picking the best mutual fund scheme doesn’t always mean the best in returns. It could be best in terms that suit your profile and goals. Here are four things to look for in a mutual fund before you buy.
1. Look At Your Goals First
The foremost thing an investor thinking of acquiring shares in any fund should do is identify his or her goals and desires for the money being invested. Are you looking for a long term lump sum income or a current additional income? Are you looking for an investment that will fund your retirement or that will help you pay off a debt? These are the basic answers that an investor should look for before investing. Identifying a goal is important because it enables one to choose wisely. Once you identify your goal, it will also help you choose the time period of investment. So that you can get the return at the right time to fulfil your goals. Ideally, investors should have an investment horizon with at least five years or more.
2. Look At A Fund That Suits Your Goals
Now, there are various types of fund that an investor can invest in. The ideal way is to pick the ones that are directly related to your goals. For instance, if an investor intends to use the money in the fund for a long term need then he should look for a long term capital appreciation fund. These types of funds typically hold a high percentage of investor’s assets in common stocks. Although this involves a fair amount of risk but good return can be expected from these types. On the other hand if an investor is in need of current additional income, he should acquire shares in an income fund like Government or corporate debt. These could be in the form of fixed deposits, recurring deposits etc.
3. Look For Past Records And Results
Investors should research a fund’s or fund manager’s past results. There are few basic things to look into while digging these records like whether the fund manager has delivered results that were consistent with general market returns or whether the fund that you wish to invest in is too volatile or was there an unusually high turnover. All this information is important as it will give the investor insight into how the fund manager performs under certain conditions, as well as what historically has been the trend in terms of turnover and return. But past records may not guarantee future returns. So it’s best to review the investment company’s literature to look for information about anticipated trends in the market in the coming years.
4. Look For Tax Savings
Like it or not, investment instruments come with a certain element of tax. And mutual fund schemes are no different. As an investor, one should always be conscious about the tax implications. So, evaluation of tax implication is very important before investing in mutual funds. Let’s take for example equity schemes, debt schemes and gold schemes which have different tax treatments. Out of which with debt or equity, one can enjoy better tax treatment as such schemes offer superior post-tax returns. For instance, investing in Equity-linked tax saving scheme qualifies under section 80C, where one can save up to 1.50 lakhs in a financial year. Dividends are tax-free in the hands of the investor and the scheme involves no long-term capital gain tax.
Selecting a mutual fund may seem like a daunting task, but knowing your objectives and risk tolerance is like winning half the battle. And if you want us to guide you and help you find the right mutual fund than write to us. Our experts will get in touch with you in no time.