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4 Important Questions to be Answered Before Investing in Mutual Funds Research Team | Posted On Monday, June 24,2019, 04:20 PM

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4 Important Questions to be Answered Before Investing in Mutual Funds



A mutual fund pools your and other investor’s money, making an investment in debt instruments, equities, money market instruments and so on, depending on the type of mutual fund. The mutual fund is managed by a fund manager. Mutual funds are classified as open and closed-ended mutual funds, on the basis of the structure of the fund.

You also have open-ended mutual funds and closed-ended mutual funds. In open-ended mutual funds the NAV changes each day, because of market fluctuations. Open-ended mutual funds are bought and sold as per demand. Closed-ended mutual funds issue a fixed number of units which are traded on the stock exchange. Closed-ended mutual funds can be traded at a premium or discount to NAVs.

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4 Important Questions to be Answered Before Investing in Mutual Funds

1. What are My Financial or Investment Goals?

Know your financial goals before investing in mutual funds. You need a well-planned investment to accomplish financial goals. Advanced investment planning helps identify and prioritize financial goals. For instance, a mutual fund investment is an ideal choice for someone who is willing to diversify risk and enjoy higher liquidity. Mutual funds can be liquidated to meet financial emergencies.

Mutual funds offer flexibility as there are a number of schemes where you may invest. Investors also benefit from low transaction costs and transparency. Mutual funds are regulated by SEBI which eliminates chances of fraud.

See Also: What You Must Know About Mutual Funds?

2. How Much Risk Can I Take?

Every investment has a measure of risk. Higher the risk, higher the return. For example FDs are quite safe compared to the stock market, though they may not give too high a return. Mutual funds are subject to market risk, interest rate risk, credit risk and concentration risk depending on the type of fund. Market risk is associated with the performance of the market, which is greatly impacted by interest rate fluctuations, recession, inflation levels, political conditions, natural disasters and so on.

As mutual funds move in-line with markets, risk is high. It is important that you understand the amount of risk you take prior to investing in mutual funds. You can build wealth if you stick to mutual funds for the long-term. Based on risk profile, investors are classified as aggressive and conservative investors. Aggressive investors are willing to take a higher level of risk with a focus on capital gains, while conservative investors are willing to take low to medium risk to earn decent returns.

See Also: Different Types of Mutual Funds

3. What is The Tenure of My Investment?

Your investment horizon defines the length of the investment. It is based on your investment objectives. If you seek to earn a higher return, choose equity funds for the long-term (a term of more than 5 years). Choose debt funds for the short-term, if financial goals are 1-3 years away. Liquid funds give you moderate returns. Investors can expect a return of 6-7% a year from debt mutual funds in India. Choose tenure in-line with financial goals.

4. What Should Be the Initial Investment?

Determining the initial amount to be invested is easy, if you are clear on your investment objectives, risk-taking ability and the investment duration. Use online calculators which help you decide the initial investment based on needs. DFHL, IDFC Mutual Fund, UTI Mutual Fund, ICICI Prudential Mutual Fund and Quant Mutual Fund allow customers to invest a minimum of just Rs 100 in the debt-equity segments. There is no restriction on the maximum investment, but do seek advice from your financial advisor before investing.

See Also: How Mutual Funds Invest Your Money?

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