In this age filled with a plethora of market linked investment options, Mutual Funds will remain a safe bet. The most appealing benefit of this low-medium risk instrument is that if offers high returns over a period of time and limits the losses (if any) to an extent of monies invested. Unlike investing directly in equities, it does not burn your hard earned money owing to market conditions and performance of the company. For those of you new to the world of Mutual Funds and excited to invest, let’s tell you how it makes perfect sense to put your money in funds that are equity based.
What is Mutual Fund?
Not as sophisticated as it sounds, it is a privately administered fund by an AMC (Asset Management Company) where investors pool money in their personal capacity. Managed by an expert known as Fund Manager, the amount collected is invested in various market linked options such as equities & bonds. Depending on the terms and the lock in period, the returns from these investments are distributed to the investors in the fund as per the units held.
These funds are known for their high returns potential, ranging between 8 to 20% annually, depending on the fund in question. Some of them continue to generate double digit growth in 3-7 years bracket.
There are many types of MFs in the market today, classified on the basis of multiple factors such as the lock-in period, sectoral schemes and so on. The most popular of the lot is Equity Mutual Funds which invest in equities, thereby offering high returns. The “risk” factor is also imminent since the investment goes into buying shares of a listed company.
Tips to Choose the Right Equity Mutual Fund
Whether you’re a first time investor or a seasoned one with good knowledge of the mechanics, a through research is required since it's relatively a long term investment. In India, there are thousands of active funds out of which a couple of hundred are bent towards equity. Let's explore a few points which require attention before choosing a specific fund. Remember, not all of them are high performing products. While some just offer average returns, others set benchmark for the market to follow.
Performance of the Fund
It's paramount to study the performance of the fund for the last few years. You can do so by referring to resources available online or by contacting the AMC. The funds can be compared against each other on the basis of the annual returns for the last three to five years. As an educated investor, look at funds which have been stable throughout this period. Consistency is the key word.
Understand where the investment goes, the performance of the company and so on.
Reputation of the AMC
An AMC will offer different types of MFs as a part of their portfolio. Use available resources to study the stability and performance of all the funds administered by a single company. Also understand the products offered by the fund house and its diversification. You may also consider visiting the nearest office to get paperwork relating to specific funds. The same can be validated against online resources for accuracy.
The background and experience of the Fund Manager also plays a key role in choosing the right equity fund since he/she is the main driver who makes key decisions on where to invest. Study his/her decisions during times of market volatility on an existing fund to understand his/her expertise and ability to safely navigate.
The Fund House deducts a small percentage of the money collected from the investor(s) known as Load. Though not substantial, these deductions can work out to be quite high over long term. There are different types of Loads such as entry/exit load which have the potential to eat into the earnings. Therefore, get a hang of this component before choosing a specific fund. A breakup of charges will be available in the offer document.
There are many such elements that can make your experience of choosing the most appropriate fund, a positive one. For beginners, a SIP (Systematic Investment Plan) can be the right deal since you invest a fixed amount every month and also get tax benefits for the locked in period. Check our resources on various fund options in India under the Mutual Funds section of this website (Investments-->Mutual Funds).
GST rate of 18% applicable for all financial services effective July 1, 2017.