Points to Remember: Before Investing In Mutual Fund Schemes
Written on Tuesday, December 8, 2015
By Priti Gaur
It has become a puzzling task for an investor to choose the right mutual fund schemes because of a large market of mutual funds. There are a number of things which should be checked by an investor before buying any scheme to match his needs and retrieve maximum benefits through mutual fund investments. One should always check both quantitative and qualitative parameters before making any choice. There are various questions that come to an investor’s mind, while he goes to invest money in mutual fund. Here are some evocative points which one should always keep in mind, while selecting a scheme.
Deciding Investment Objective: This is the most important and strenuous step before any investment. One should always have the clarity that why is he going to invest, as it makes investor’s decision easier where the money would be invested i.e. debt, equity, gold or blend of all. It also helps to identify the risks and benefits of investment.
Fund house selection, fund manager experience, track record and consistency: For every person money is very important, so in order to avoid any unforeseen circumstances, an investor should always check the reputation and rank of the fund house. He should always check all the other schemes performances of that house in which he is going to invest his money. Always invest in a reliable and determined fund house. The fund manager is a person under whose guidance the investor endues his money. A good fund manager is not only important for the fund house but also for an investor. He plays a vital role in managing the schemes offered by any fund house. The investor should always check the educational qualification, past experience and performance of all the schemes, which comes under the same manager. Return of the schemes should be compared with other mutual fund houses.
Asset Allocation: If asset allocation of the scheme is properly variegated, then this minimizes the risk. Over diversification may however, increase the cost of swirl of the portfolio though, it is good from the safety point of view but, will reduce the returns generated by the scheme. It is not necessary if the scheme did not perform well in the past then then it won’t perform well in the future as well. But, it’s good to check its benchmark and the stated objective. One should always check the benchmark returns of the fund and compare them with the scheme return. Somewhere, this is the best way to know the future performance of the scheme.
Risk Analysis: Before selecting any scheme, one should always check risk rather than benefits. Mutual funds being market linked are prospects for stock market related risks. Two aspects that investors should take into account are volatility of the fund as indicated by the Standard Deviation (SD) and risk-adjusted returns as calculated by the Sharpe Ratio (SR). Always think about long-term benefits and risks.
Tax Implication in Mutual Fund Schemes: Evaluation of tax implication is very important in mutual funds. As an investor, one should always be conscious about the tax implications of such investments. For Example- Equity schemes, debt schemes and gold schemes have different tax treatments. Mutual fund schemes, say it debt or equity, enjoy better tax treatment and offer superior post-tax returns. For instance, investing in Equity-linked tax saving scheme qualifies under section 80C, where one can save up to 1.50 lakhs in a financial year. Dividends are tax-free in the hands of the investor and the long-term capital gain tax is also NIL.
Choosing Mutual Fund Schemes: A mutual fund scheme usually has three investment options: Growth, Dividend Reinvestment and Dividend Payout. Selecting the right option is extremely important as it can really affect your overall return. In growth options, you will not get any returns or dividends during the period of the investment. Your net returns will be when you redeem your units. While the dividend option gives you return at periodic intervals in the form of dividends. Further, you can choose to either receive these dividends or get them reinvested in the fund.
Don’t time the market: This is the point, where many investors make mistakes. They try to look up the market on the basis of their near term benefits. Equity fund market is unpredictable. But, it is always suggested to opt for long term equities. SIP is one of the most tested ways to strengthen your decision.
#Mutual Fund investments are subject to market risk. Read scheme documents carefully before investment.