Questions You Need To Ask Before Investing In A Mutual Fund

*Please note that the quotes shown will be from our partners

What is a mutual fund?

In mutual funds, an asset management company pools money from various investors and further invests in various assets classes such as debt funds and liquid assets. There are various types of mutual funds depending on the structure, asset class, and investment objective. On the basis of structure, the mutual funds are categorized into open-ended mutual funds and close-ended mutual funds. Growth funds, liquid funds, and income funds are the types of mutual funds depending on the objective of investment. You can easily invest in mutual funds with the help of the online medium. You should do a lot of research before investing in mutual funds regarding risk, returns, and investment. The best thing about mutual funds is that they are registered with Securities and Exchange Board of India. SEBI is responsible for regulating security markets before collecting the money from various investors. You can easily sell your share whenever you wish. The online mutual fund calculator provides a great support in selecting the best mutual fund present in the Indian market.

What are the advantages of investing in mutual funds?

There are various advantages of investing in mutual funds. Check some of them:

  • Diversification: Through mutual funds, you invest in various asset classes such as debt funds and liquid assets. Diversification helps to reduce your risk and maximize your returns. That is why a mutual fund is one of the best investment options present in the market.
  • Many choices: Another benefit of investing in mutual funds is that you have many choices. A variety of schemes are available to suit your long term needs. The investor can have some discussion with his or her financial advisor whenever a new phase in life begins to work on the portfolio.
  • Tax benefits: An investor is eligible to enjoy various tax benefits when he or she invests in capital gains for one year or more. You also become eligible for some benefits of the tax deduction when you make an investment in mutual funds.
  • Professional management: The money that is invested by various investors with a lot of expectations is professionally managed by experts who use their experience and skills. An asset management company has a term of researchers who help in determining the potential and performance of various corporations. Your funds are managed in such a way that you earn maximum returns on your investment.
  • Regulations: The best thing about mutual funds is that they are registered with the Securities and Exchange Board of India. SEBI is responsible for regulating security markets before collecting the money from various investors. All the corporations of mutual funds are required to follow the guidelines given by the Securities and Exchange Board of India to protect the interest of the investors.

What are the questions that you need to ask yourself before making an investment in mutual funds?

Check out the various questions that you need to ask yourself if you are planning to make an investment:

1. What is your financial goal?

If you are planning to make an investment in mutual funds then the first thing that you should know about is your financial goal. The various other decisions are taken on the basis of the financial goal. You have to be specific about your financial goal. The scheme should be selected after considering the financial objective. Many people make this mistake of selecting a scheme which does not match with their objective. They select the scheme on the basis of returns and performance. This approach should not be used. Your investment objective generally falls into these categories including income, capital preservation, and growth. The growth strategy is for those investors who are young and can tolerate risk. The capital preservation strategy is for those investors who are more conservative and near to retirement age.  Their main aim is to protect their assets. The income strategy is for those investors who are retirees and yield starved.

2. What does the mutual fund include?

Once you are known about your investment goal the next step is to check whether the portfolio of a fund aligns with your financial objective or not. It is important that you go through the important details of a fund before making an investment. You cannot understand what a fund includes in its portfolio without doing sufficient research. A fund cannot be selected by just looking at its name. Suppose an investor has a growth objective and has selected some mutual funds which are mainly focusing on large-cap equities. You might pick a mutual fund thinking it the cheapest one and also managed by a decent manager. You are probably making a mistake as there are a lot of others things that you must consider.

3. How expensive is the fund?

You should select that mutual fund which aligns with your financial objective. The next step that should be considered is to keep the cost to the minimum. The first thing that you have to do is to know about your financial goals. Once you have identifies your investment goals. The next step is to find out some of the mutual funds that align with your financial objective. Once you have narrowed down your list, you should select that fund which aligns perfectly with your objective and also involves low expenses as much as possible.

 4. Who runs the mutual fund?

Once you have narrowed down the list with some mutual funds that align with your objective, you should consider the fund manager. The success of your mutual fund will totally rely on the experience and skill of your portfolio manager. It is important to know who is managing the fund. You should also try to check the record of a particular fund manager. It is not necessary that if the performance of the manager was good in past years then you will definitely achieve good returns. It is still better to go with a fund manager who has maintained a good record in past 15 years than to go with a manager who could not even make a good record for a year.

 5. Is the fund tax-efficient?

It is a fact that sometimes taxes take a bite from your investments. So you should opt for those funds which are tax-efficient so that you can have more returns in the future. The investment approach used, type and amount of distribution paid, and trading frequency of the fund are some of the factors that are considered to know if a fund is more tax efficient than another fund.

6. Which class of share is suitable for me?

There are three classes of mutual funds including A shares, B shares, and C shares. Once you have selected a fund, the next step is to select the right share class. The only difference that these share classes have is the type of expenses and fees related to them. You should take some time in order to know the fees associated with each share class and select that share class which aligns with your investment objective.

Conclusion:

A mutual fund is one of the best investment options available in the market for investors. An asset management company collects money from various investors and invests it further in stocks, bonds, and money market securities. The returns that are earned are distributed to the investors in the same proportion they contributed. There are many advantages of investing in mutual funds. People are eligible for various tax benefits when they invest for a long period. Mutual funds provide an opportunity for the investors to invest in various asset classes. This investment option is managed by a team of experts who have thorough knowledge and experience. The best thing about mutual funds is that they are registered with Securities and Exchange Board of India or SEBI.

The first question that a person should ask before making an investment in mutual funds is what his or her financial objective is. Many people select a fund depending on the past performance and returns. This is not a right approach. The first step should be to know about your financial objective. Once you have selected your financial objective, it would be easy for you to select a fund. Income, capital preservation, and growth are the three categories in which generally your investment objective falls. Once you have identifies your financial goal, the next step is to check whether the portfolio of the fund aligns with your financial objective or not. If it aligns with your objective then it can be a good fund option for you. Many people select a fund just because it is the cheapest one and managed by a manager having a good record. It should not be done. It is important to be sure that your goal aligns with the fund otherwise you will end up wasting a huge amount.

After narrowing down a list that aligns with your financial goals, you should consider the cost of various funds. You should select that fund which involves low expenses but it must align with your financial objective. As you consider the cost before making an investment in the mutual fund, you should also consider the fund manager who will manage the fund. You must check the past performance of the fund manager before selecting any mutual fund. It is not necessary that if the performance was good in past years, it would also be in the future. It is better to make an investment in a mutual fund that is managed by a fund manager who has a good record in past 10 years than to invest in a mutual fund managed by a fund manager who does not have any good record even in past one year. That is why you must check out the past performance of a fund manager before selecting a fund.

You must prefer that mutual fund which is tax-efficient. There are some factors that will help you to know if a fund is tax-efficient or not. These factors include the investment approach used, type and amount of distribution paid, and trading frequency of the fund. A shares, B shares, and C shares are the three classes of share. While investing in mutual funds, you should select a share class appropriate for you. There is only one difference between these share classes. The only difference is the type of expenses and fees related to them. Make sure that the share class that you select should align with your investment objective. You must do enough research before investing in any fund. The fund prospectus should be checked thoroughly so that no confusion arises at a later stage. You can easily invest in a fund via online medium without any problem. Whenever you need money, you can sell the mutual funds easily.

If you are looking for the answers to various questions including:

  • What is a mutual fund?
  • What are the types of mutual funds?
  • What are the advantages of investing in mutual funds?
  • Is there any tax benefit for investing in mutual funds?
  • Why I should invest in mutual funds?
  • What are the questions that you need to ask yourself before making an investment in mutual funds?

Then you are at the right place, please do scroll up the page in order to get answers to all of your questions.