Tips and tricks for choosing a good mutual fund


A mutual fund is an alternative investment instrument for small as well as big investors. Before investing in a mutual fund you have to choose the best fund that suits you because every fund has its own objectives. To choose a mutual fund you have to understand certain things and terminology in finance. In this article, we have discussed what are the key factors you must know before investing in a mutual fund.

Mutual fund investment is always subjected to market risk. A mutual fund is an alternative investment vehicle where an asset management company manages your investment on behalf of you and charge some fees for their services. Those who manage your fund are called fund managers and the company that sponsors this mutual fund business are trustees of the asset management company. Every mutual fund is not similar, some of them are growth-oriented; some are invested in steady nominal growth and few of them are interested to give a dividend to the investors. According to your requirement, you have to choose the mutual fund that suits you. Certain things you have to keep in mind before choosing a mutual fund is described below

1. Risk appetite and your goals

High growth-oriented mutual funds are always associated with high risk. If you have the risk-taking ability, then you may choose these types of funds. If your objective is to get a higher return on investment then midcap and small-cap funds are good for you.

2. Funds expense ratio

While choosing a mutual fund keep track of the expense ratio of the fund. The expense ratio indicates how much percentage is being treated as a cost for managing the fund. You will easily get this information on the website of the concerned mutual fund AMC. A low expense ratio is always preferred. For a high expense ratio, your cost for managing the fund will get higher and thus it may lead to a reduction in the profit margin.

3. Entry and exit loads

Always check before investing what are the charges applicable while investing in the mutual fund. When someone invests, some entry loads are applied. Also, again while selling the mutual fund, some exit loads will be applied to it. Some mutual funds remove their exit loads with certain conditions. So before investing in mutual fund extry loads, read the exit loads information in the scheme details.

4. Benchmark of the mutual fund

Benchmark is very important from return on investment perspective. Benchmark defines where this mutual fund invests its money. For example, if benchmark is nifty 50, then it clearly indicates that the fund tracks their investment in proportion with the weight of stocks that are in nifty 50. If a fund belongs to a midcap category, then it's benchmark will be nifty midcap or something like that.

5. Choose a diversified fund

Diversification of any fund offers a low risk than any sectoral fund. If you invest any sectoral fund then you have a risk if that particular sectorial index underperforms. Choosing a diversified fund gives you relief of managing the risk however too much diversification always gives you lower returns. In the mutual fund scheme details, you will get the information in which sectorial stocks are being held by the mutual fund and you will get an idea about sector allocation of this fund.

6. Overseas fund

Some mutual fund offers schemes like overseas funds that invest money in overseas stocks. Before investing in this type of mutual funds you have to keep in mind that this type of fund performance is impacted by global events, currency exchange rate, etc. This type of funds are generally not suitable for small investors and are designed only for HNI (high net worth individuals ).

7. Index funds

This type of fund tracks the index and invests money in the stocks which are in the same weight of the index. Index funds give the same amount of return as the corresponding index gives. Generally, index funds have lower entry and exit loads, some schemes have no entry and exit loads and very low expense ratio.

Conclusion

Investment is an art and it requires a lot of hard work and decision-making ability. Before investing in any mutual fund you should go through the scheme details very carefully and collect the information described in this article. You have to understand mutual funds are not quick rich schemes,lots of factors decide the performance of the fund. So invest carefully.


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