Some precautions are needed while buying mutual funds so that you don't end up buying funds which are not suitable for your portfolio and investment goals.
Mutual funds have emerged as one of the most popular investment options in recent years, particularly after the demonetisation of high-value currency notes. More because they not only provide better returns and diversification, but are also easy to buy and manage as they are managed by professionals. Still, some precautions are needed while buying mutual funds so that you don’t end up buying funds which are not suitable for your portfolio and investment goals.
Here are five factors to keep in mind while investing in mutual funds:
1. Time is Key
Time is key to your investment. If you are investing for the short term, think of liquid funds or short-term debt funds, where your money would be safe and grow conservatively. For any investment horizon over three years, pick an equity mutual fund for best returns.
2. Make Investments Goal-Oriented
Make your investment goal-oriented when you invest in mutual funds. This would help you pick the right kind of fund. For example, “equity-linked mutual funds are best suited for long-term goals such as retirement. Buying or selling a mutual fund should not be based on a fund’s popularity or a friend’s recommendation. Rather, it should meet the goal you have set for yourself,” says Adhil Shetty, CEO, Bankbazaar.com.
3. Read Fine Prints
When you decide to invest in mutual funds, you should read the fine prints carefully and understand all the charges, exit load and any other fees to avoid any kind of bitter shock. Do your research well before selecting your fund. If in doubt, go to a mutual fund aggregator that will help you finalise a fund based on your need.
4. Don’t Go Only By Fund Ratings
Don’t follow fund ratings blindly as they fluctuate. It is better that you study about a fund’s long-term performance and then go for the fund which is suitable for you.
5. Choose Direct Plan
If you are a savvy investor and know how to pick and manage your funds, then go for a direct plan. “This means buying a fund directly from the company without the help of any intermediary or broker. This may prove tricky as you may end up choosing the wrong fund, but it will help you enjoy a lower expense ratio and higher returns. If you’re in doubt, let an aggregator help you shortlist a regular plan where you will also get such facilities as a fund dashboard to track your fund performance,” says Shetty.