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Check this before Investing in Mutual Funds Research Team | Posted On Saturday, November 14,2015, 05:10 PM

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Check this before Investing in Mutual Funds



You want to invest in the stock markets, but you are afraid. You want to enjoy the gains in the stock market, but you are also afraid of losing your hard earned money.This is when you decide to invest your money in a mutual fund. Your money is managed by a portfolio manager and you do not have the headache of investing in the stock market. Timing the stock market is not easy. Deciding which stocks to invest, is even more difficult. And when are you going to invest…?This is a question to which you have no answer.

Check the past performance

Check the past to predict the future. This is a practice followed, to learn how a mutual fund might perform in the future. While this practice cannot guarantee you on how a mutual fund will perform in the future, it might give you an idea of its likely performance. Check the track record of the mutual fund over a long period of time, say 3-5 years. A mutual fund which performs well over a long time period is likely to do so in the future. You might have been a good student in your college days. But how did you measure your performance?

You compared your performance with the topper of your class. The topper of the class (if you were not the topper), set the benchmark for your performance. In the same way, you must compare the performance of a mutual fund with the benchmark indices. The benchmark indices such as the CNX Nifty 50 and the BSE Sensex, give you an idea of the performance of the stock markets. Measuring the performance of a mutual fund over a short-term say a year, is a bad idea. You would not get the correct picture of the performance of the mutual fund over so short a period of time.

Study the portfolio of the mutual fund

You have invested your hard earned money in an equity mutual fund. You must check the portfolio of this fund. Study the stocks which the mutual fund has invested in. Make sure the portfolio of the mutual fund is well diversified. If you have invested in a debt mutual fund, study the credit profile of the debt mutual fund. Check the credit rating of the bonds, which the debt mutual fund has invested. Also, study the sectors where the debt mutual fund has picked up the bonds. Is it real estate, infrastructure, banking, commodities, retail or NBFC. You have to be careful of sectors which are regarded as weak.

SEE ALSO: How To Choose The Best Mutual Fund?  

Take a look at the expense ratio of the mutual fund

Take a look at the expense ratio (Fees the mutual fund charges you), before you invest in the mutual fund. If you invest in the direct scheme of a mutual fund, you have a lower expense ratio. You invest directly with the AMC (Asset Management Company) under the direct scheme. There are no intermediaries like a mutual fund distributor and you save on their commissions. An equity mutual fund is actively managed (Fund manager has to actively make decisions where to invest). This means equity mutual funds have a higher expense ratio.

Debt mutual funds are passively managed. They have a lower expense ratio than equity mutual funds. If a debt fund has a high expense ratio you need to avoid it. Even if you get higher returns from the debt mutual fund, a higher expense ratio will eat up your returns.

Monitor your mutual fund

You need to regularly check the performance of the mutual fund. Mutual funds are affected by adverse economic conditions. They would occasionally fail to give good returns. Do not panic or go overboard in your reactions. The mutual fund will give you good returns, once the economy bounces back.

Follow these points whenever you make an investment in a mutual fund.

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