Understand the risk associated with the funds as mutual funds are market-linked. Depending on your timeline, select the right scheme, as different funds have different timelines.
The industry not only recovered from the massive losses in March due to a sharp erosion in the equity market and outflows from debt funds but also added Rs 4.5 lakh crore in the year to close at Rs 31.02 lakh crore.
With various platforms now offering to invest in mutual funds, investing in mutual funds has never been easier before. Through such platforms/ portals, investing in mutual funds is not only convenient but also cost-effective.
Having said so, there are investors who still believe in old perceptions, opinions, and myths. Such as timing the market, not understanding the risks, etc. Experts say, while doing so, investors risk their investments and end up losing their money. Hence, there are a few things one should not ignore while investing in mutual funds.
Track record of the fund Take a look at the track record of a fund. Such as how long has it been for the fund, how consistently it has performed over the years, etc. Experts say, in the case of equity funds a minimum track record of 5 years is necessary and for debt funds a minimum period of 3 years is good. This shows how a fund has performed over various market cycles, to help you decide.
Investment strategy To see whether the fund is right for you, take a look at the fund’s investment strategy. For instance, funds that invest in mid-and small-cap stocks are more volatile and will not be the right option for risk-averse investors. Also, debt funds that invest in instruments with lower credit ratings may pose a higher risk, whereas funds that invest in instruments with high average maturity can also be volatile if the interest rate suddenly goes upward.
Ability to contain falling market While choosing a fund, do not look at only the fund’s returns in bull markets but also how it contains declines in bear markets. Industry experts say a fund should be able to contain declines better than the benchmark in a falling market.
Time-frame of holding the fund Different categories of funds call for a different kind of time-frame that investors need to understand, before choosing to invest. For instance, equity funds usually have a longer time-frame, while debt funds have different time-frame horizons. Hence, it is important to choose the one that fits your requirement.
Understand the risk associated with mutual funds Understand the risk associated with the funds as mutual funds are market-linked. Depending on your timeline, select the right scheme, as different funds have different timelines, or else they don’t perform to their fullest.