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MUTUAL FUND INVESTMENT: STEP BY STEP APPROACH TO FOLLOW BEFORE INVESTING IN MUTUAL FUNDS

With around 1200 mutual funds, 46 fund categories and 45 fund houses to choose from, selecting an apt fund scheme would be a daunting task for new investors. Investors are often overwhelmed with a wide variety of investment options and types of mutual funds to choose from. This article aims to provide a mutual fund investment guide about steps to consider before investing in mutual funds.

Here is a step-by-step approach to follow before you invest in mutual funds:

  1. Align investments with your financial goals

Aligning your mutual fund investments with your financial goals aid to decide the amount one should invest and the required time horizon. Setting a time horizon for achieving your financial goals will help determine whether to invest in equity, debt, or hybrid funds. For instance, as equity funds have the potential to beat the volatility in the long run, investments made for long-term goals can be made in equity funds. Similarly, as fixed-income instruments provide greater income certainty, debt funds are more suitable for purposes that are likely to mature in the short term.

  1. Review investment objectives and strategies of funds

All mutual funds are mandated to clearly state their investment objective and strategy that reveals their asset allocation strategy and broad fund management style. Doing this will aid you to understand whether it would match your financial goals, investment philosophy, and risk profile if any. Investors can find the fund’s investment strategy and objective in Scheme Information Document (SID), Key Investment Memorandum (KIM), product presentations, product leaflets, and other product kinds of literature.

  1. Check the fund’s past performance

Make sure to check the performance of selected funds with other funds and benchmark indices over varying time periods such as 1 year, 5 year, 7 year, and 10 years. The past performance of a fund does not guarantee same performance in the future. However, doing this would help to compare how the fund dealt under varying economic conditions in the past vis a vis its peer funds and its outperformance of its benchmark index.

  1. Don’t forget to consider the fund’s expense ratio

Expense ratio refers to the per-unit cost incurred on managing a fund scheme. It is attained by dividing annual operating expenses as a percentage by average daily net assets. The operating expenses comprise of investment management and advisory fees, transfer and registrar agent fees, commissions paid to distributors, fund administration expenses, audit and legal fees, and marketing and selling expenses.

Remember, the lower the total expense ratio, the higher is the NAV (net asset value) of the fund, and eventually, the higher money you take home as an investor.

  1. Make sure to check the experience and reputation of the fund house

While several investors tend to focus on just fund managers while evaluating the future potential of their mutual funds, the fund houses and their investment philosophies also play a significant role. Good fund houses stress more importance on building a robust organizational process and an outstanding management team in place than focusing on fund managers only. Thus, even if the star fund manager leaves the fund house for better opportunities, the strong administrative process of that fund house would ensure continued outperformance of the funds.

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