Investing in the right mutual funds can be tricky. Sometimes even experienced investors might fall prey to the market fluctuations. And if you are new to investing it might be even more difficult for you to figure out where, when, how much to invest and for how long. Here’s a list of some of the key points that you need to consider before proceeding to invest in any mutual funds available.
- Figure out the type of mutual fund scheme in which you want to invest – the first thing you need to do when you decide to invest in mutual funds is to figure what kind of mutual fund investment best suits you. There are multiple types of schemes available for you to choose from. Depending upon the amount you are willing to invest, the risk you are willing to take, and the time period which you are most comfortable with, you can choose what kind of mutual plan you want to invest in.
The three primary types of Mutual funds are – Equity funds, Money Market Funds and Debt Funds. Once you decide the kind of mutual fund in which you want to invest, you just have to compare all the options available for you to invest in that particular fund type. Here are some of the paradigms which you can use to compare and contrast different mutual funds schemes to pick the best deal for yourself.
- Fund Performance – Before investing in any mutual fund online, you should carry out a thorough research. Take a good look at the life of the fund that interests you and carefully study its past performance. Choose a fund that has a comparatively more stable performance as compared to other funds available on the market. You do not want to get your money invested in a mutual fund that only performs better when the market is flourishing but drops down fast whenever there is a fluctuation in the market. The best kind of a fund is the one that can firmly stand both the bulls and the bears. Along with the history of each individual mutual fund, also look at the fund houses they belong to. Preferably choose long-standing, experienced fund houses. Once you have collected data for different mutual funds belonging to different fund houses, compare the data and invest in the one that offers the highest potential returns.
- The Expense Ratio – Expense Ratio refers to the annual fees charged by the all the funds in order to cover their management fees and administrative costs. The trick is to choose the fund with a comparatively lower expense ratio. Mutual fund calculators might help you out in this area. A lower expense ratio means that the fund size of that particular fund has increased considerably, which essentially means that they have a larger number of assets under management, thereby making the expenses being spread out over a large number of investors. The basic idea of Mutual funds is the pooling resource principle. The cost of managing this investment is also spread over all the investors. This means that the individual investors have to bear only a small portion of the cost, whereas the fund being a large amount enjoys a better bargaining power in the market, making it an overall profitable deal.
- Decide when to invest a lump sum and when to consider a SIP – A lot of investors choose to juggle between investing a lump sum in one go on the one hand and investing in a SIP on the other. Investing a lump sum is when you invest your total amount in one go. It takes a great deal of consideration of the market and the perfect timing for the investment in order to maximize the returns. The other option is to go for SIP. SIP refers to Systematic Investment Planning. In this mode you can choose to invest your total amount in installments on a weekly, monthly or quarterly basis. It doesn’t require an understanding of the market in the way that the lump-sum mode does. The SIP mode is popular amongst the advisors because it demands lesser commitment than the lump sum mode does, and since the entire amount is not invested in one go, it considerably reduces the risk involved.