The investor can select a mutual fund based on several factors, such as the expectation of return, the risk tolerance, and the investment horizon. If you map different parameters like expense ratio, past performance, fund manager experience, and assets under management into one, you will have a clearer picture of where you should invest.
The following factors need to be taken into consideration when selecting a mutual fund:
Objective
When deciding how much to invest, you should consider your investment goal and target date, as well as the rate of return you expect. In the absence of a clearly defined goal, you might lose interest in your investment. You may set short-term goals, like buying utilities, or long-term ones, like planning a house down payment or going on an international trip.
In order to decide which type of mutual fund you should invest in, you will need to take into account the goal of investing in a particular fund – equity or debt mutual funds. Investing can be about tax savings or capital appreciation, depending on the investor. Choosing a fund will be influenced by what you are hoping to accomplish.
The Risk
When you don’t know what you’re getting into, there’s a risk involved. An investor should evaluate how much risk is associated with their investment and whether it aligns with their own risk profile before selecting a mutual fund.
A portfolio of equity mutual funds might experience ups and downs in the short term due to volatility. On the other hand, equity mutual funds can offer higher returns. If you plan to invest over the long term, equity mutual funds may be a good choice.
Liquidity
Investors should first and foremost determine when they will need their investment. If the money is needed in the near future, equity mutual funds are not your best option.
The best way to invest cash that can be preserved without worrying about market fluctuations is through equity funds. The fact that money is left untouched for a long time is important, too, since compounding is most effective. In this case, liquid funds are the best option if you only need to raise money for a short period of time.
Investing Strategy
Although mutual funds should be included in each investor’s investment portfolio, most investors overlook this component. Fund houses are known for their investment strategies, also known as their investment approaches, which detail how they invest their funds and hold their schemes.
Performance of funds
Fund performance should be viewed from a long-term perspective rather than from a short-term perspective. It is important to take time into account. Through multiple changes in investment strategy during the course of a market cycle, consistent returns should be achieved. When a fund does not beat its benchmark over a period of three, five, seven, or ten years, there is a reasonable chance the investment will not be good going forward. It is also important to consider a fund’s performance in light of the management team. Investors would benefit from investing in a fund managed by an experienced, stable, and competent team with a proven track record.
Ratio of expenditures
The fees or commissions that investors pay for investment management help ensure their investments are properly managed. To maintain profits on all their investments, all investors pay this fee to the fund manager. If compounded over an investor’s portfolio, the expense ratio will have a vast impact, regardless of how small it might seem. This says that the lower the expense ratio, the more assets that can be managed.
Entry and Exit Load
Entry loads are the fees charged by fund houses to investors who are interested in investing in their mutual fund schemes. An exit load is a fee charged to investors when they withdraw from mutual fund schemes. While most fund houses no longer charge entry loads, exit loads do remain. While exit loads are only charged for withdrawals before a certain date, they might also have additional conditions attached.
Taxes
Mutual fund investing involves tax considerations that investors should keep in mind. Investments in mutual funds have a relatively high rate of return after tax in comparison to other investment vehicles. Upon redemption, equity fund units generate returns that are taxable based on both the holding period and tax rate. For equity funds withholding periods of over 12 months, the Long Term Capital Gains tax rate is 10%. Short-term capital gains are taxed at 15% on holdings longer than 12 months.A Debt fund will offer indexation benefits if capital gains are realized.
The term long-term holding period refers to the holding periods which are longer than 36 months. Short-term holding periods are included in investors’ tax returns for holding periods less than 36 months. Therefore, you should consider the tax implications before you decide which fund category to invest in.
Direct Plans
Direct plans are generally suitable for individuals who prefer to invest straight through an AMC and boost overall mutual fund returns. The regular plan, on the other hand, is for individuals who do not have sufficient market information and require guidance as well as a frequent assessment of their investments.
Often, AMCs reclaim this money through their expenditure ratio. Regular mutual funds have a bit higher charge ratio than direct mutual funds. As a result, direct plans likely to generate slightly larger returns. As a result, for traders who aren’t well-versed in the markets, a regular plan is significantly more simple.
To Summarize
In order to achieve set goals and achieve your investment objectives, selecting a mutual fund is an important step. There is a high chance of getting confused and ending up in tough spots when there are so many options available. Thus, when making a final investment decision, the best course of action is to consider all relevant factors and map out the desired investment across them.
