How To Choose The Right Mutual Fund For You?

Aug 9, 2022

All one needs to have are the fundamentals and the zeal to further their investment education to make wise, well-informed decisions and choose the right mutual fund. Mutual funds are among the most popular investment opportunities. Both novice and experienced investors can choose mutual fund investments, with a wide range of experience in investing.

A mutual fund is an investment opportunity that collects money from several participants into a single pool. The fund manager can use this cash to invest in various securities, such as stocks, gold, and bonds. Each mutual fund has a specific goal.

A one-time investment or a systematic investment plan (SIP), which requires the investor to make monthly investments at set intervals, are options for investing in mutual funds. First-time investors can register for a mutual fund account through a simple procedure. Online platforms that make the registration process entirely paperless and take just a few minutes to complete make this possible. But, first, knowing how to choose the best mutual fund before investing is crucial.

Steps To Choose the Right Mutual Fund

1. Do Your Research

While picking the right mutual fund, there are various parameters to consider. For example, return expectation, risk tolerance, and so on. The investment can be predicted based on parameters such as past performance and expense ratio. Therefore, before embarking on your investment journey, it is critical to undertake some research. This research will help you make a more informed decision. It will give you a clear understanding of the different aspects of mutual funds.

2. Know Your Goal

The first thing in selecting a mutual fund is determining the aim – the period you want to invest for, return expectations, and the final lump sum amount. These factors will help you select a fund most suited to your needs. But, even without a defined destination, one does not have to abandon their quest.

There can be many reasons to invest in a mutual fund:

  • Higher education.
  • A down payment on a house.
  • Long-term aspirations like retirement.

Then, determine the appropriate mutual fund category depending on the purpose. The selected mutual fund can be a debt mutual fund, a hybrid mutual fund, or an equity mutual fund.

3. Do a Risk Analysis

This relates not only to the investor’s risk tolerance but also to know the risks associated with each mutual fund. Risk analysis is also important to determine the suitability of a mutual fund and its risks to an investor’s risk tolerance. For example, equity mutual funds carry a higher risk level, and the portfolio may experience ups and downs in the near term. However, the returns of equity mutual funds are frequently higher than those on other funds, making them suited for investors willing to take the “high risk, high reward” strategy.

On the other hand, debt mutual funds carry less risk and are more , but their returns are less than those of equity mutual funds, making them perfect for conservative investors and beginners.

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4. Check the Expense Ratio

Expense ratio is the commission levied for effective investment management. Since one can calculate the expense ratio over the investor’s whole portfolio and it has a substantial influence, investors must look for mutual funds with lower expense ratios. It is commonly believed that the expense ratio will decrease as assets under management (AUM) increase.

5. Consider the Taxes Your Investment Attracts

Investors, particularly newcomers, should not ignore the importance of tax consideration. The holding period and applicable tax rate are used to determine how to tax the returns from equity mutual funds. Post-tax returns from mutual funds are frequently adequate. For instance, long-term capital gains (when the holding period is 36 months and beyond), over and above the exemption level of INR1 lakh a year, are taxed at 10%. Short-term capital gains (when the holding period is shorter than 36 months) are taxed at 15%. A cess and surcharge are also levied on these capital gains.

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Starting your investment journey may seem a difficult chore. But once you start and understand more about investments, investing will become a healthy habit that will help you accumulate wealth. Before selecting the right fund to invest in, successful investing will necessitate taking into account the factors above. You must monitor the fund’s performance and make necessary adjustments. Investing across several asset classes will help you build a diversified portfolio.

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