Mutual funds are, of course, a fairly popular option for many investors. Thanks, in part, to their very concept of investing across multiple securities. Managed by a professional team, this lowers risk and offers a certain level of peace of mind.
But the markets can often be volatile. An inherent risk factor then, still remains. It is critical for every investor to understand the complete picture before they dive into their mutual fund of choice. Regardless of whether you’re risk averse or not, it is always advisable to invest in reliable and trusted mutual fund schemes. One of the primary reasons for this is that the rapidly changing stock market and its susceptibility to many factors of all kinds. Investing in reliable mutual funds offers a hedge against any large downside risk, provided the mutual fund itself is built on a solid foundation and run on sound principles and expert guidance.
To make things easier for newbie investors, here are some tips that can work as a roadmap to making an informed choice:
#1 – Identify the period and purpose for the investment
First and foremost, an investor would do well to identify, conclusively, the primary nature of the mutual fund they want to invest in. There are certain questions that every investor must decide upon before making an investment. These questions are:
-The objective of making the investment – whether the purpose is for long term capital gains or for taking care of certain expenses in the near future such as immediate college expenses etc.
-The kind and magnitude of risk the investor wants to undertake
-The time period for which the investor wants to stay invested.
Answer these questions candidly, and they should be of great use in narrowing down the mutual funds which suit your needs the best.
#2 – Ascertain the Degree of Dynamicity in the Investment
An investor could opt for either an actively managed mutual fund or a passively managed one. The primary difference between the two remains that in case of the former, a full time portfolio manager is appointed for making quick decisions on its asset management. As a general norm, active funds perform better than the benchmark index set in a particular field, yielding more returns. In turn, since they involve constant vigilance and strategizing, a higher fee is often charged from investors.
On the flipside, in case of the latter, the exact route taken by the benchmark index is replicated. It is a more mechanical way to invest, and does not involve constant changes and strategizing. As a consequence, a lower fee is charged.
#3 – Minimum or no load mutual funds are preferable
Loads are the incidental fee that investors may have to pay in connection with their transaction on the mutual funds. They are of two types – front load and exit load.
A front load refers to the fee that has to be paid as and when units are purchased. An exit load, as the name suggests, has to be paid at the time of the redemption. Loads fees are typically 1-2% of the total transaction amount. However, they can also be higher in some cases. It is crucial an investor prioritise a no-load, or minimal load mutual fund, as the net returns without a load deduction could be significantly higher.
#4 – Evaluation of the mutual fund or benchmarking
Benchmarking refers to the practice of evaluating the quality of the mutual funds against the standard market performance. By virtue of this, the quality of the mutual fund is evaluated against the fund peer markets. This is a reliable yardstick while trying to anticipate the future course of the mutual fund.
The track record of a mutual fund can speak volumes about its future course as well. Therefore, a background evaluation is a necessary step before making the actual investment. In order to adequately evaluate the track record of any mutual fund, determine the answers to the following questions:
-Whether or not there were volatile changes in the returns of the mutual funds?
-Was there an unusual or unprecedented raise in the turnover?
-The performance of the fund manager vis a vis the market trends and returns.
Other questions may depend on the nature of the mutual fund and the general nature and reputation of the fund manager.
In addition to this, investing with a well-known scheme ensures professional management – so an investor can more or less rest assured that their money is in safe hands. These mutual funds like SBI mutual fund appoint trained professionals to work on delivering the maximum possible returns. SBI Mutual fund is a trustworthy mutual fund scheme. It not only carries the reputation and standards of India’s largest bank – SBI, their track record also shows an enviable performance.