While there are many advantages of investing in mutual funds, there are many factors that you must keep in mind before investing. Here we are taking a look at 5 such factors.
There are many avenues like direct equities, insurance products, debt products (fixed deposits, bonds), gold, etc. in the market, for one to invest in. However, mutual funds are one of the best investment options to achieve your financial goals. Mutual funds offer a variety of products to suit different investors’ needs, goals and objectives. They are managed by professional fund managers, who along with their in-house financial analysts and research personnel, are in a much better position to take investment decisions. Further, mutual funds are well diversified, which helps in reducing the overall portfolio risk.
While there are many advantages of investing in mutual funds, there are many factors that one must keep in mind before investing. Here we are taking a look at 5 such factors:
1. Know your Investment Time Horizon
Investment time horizon is one of the most important factors to be considered, before investing. Mutual funds provide a variety of options to suit one’s needs. For long-term goals, i.e., goals with an investment time horizon of at least 5 years (such as retirement or children’s future goals), one should invest in equity-oriented mutual funds. Similarly, one can invest in debt funds for medium-term goals (time horizon of 3 years). For short-term goals such as vacation, contingency, etc, one can invest in liquid and arbitrage funds.
2. Assess your Risk Profile
The second important factor to be considered before investing in mutual funds is your risk profile as an investor. An investor’s risk profile is determined by his/her behaviour towards risk as well as the capacity to take risk. Considering your risk profile, you can select the asset class and type of fund to invest in.
For example, debt funds are suitable for conservative investors, who would like steady returns from their portfolio. Whereas investors who are willing to take a certain amount of risk, and are comfortable with fluctuations in their portfolio (balanced to aggressive risk profile) can invest in balanced and equity funds.
3. Define a Purpose/Investment Objective
Every investment should have a purpose or an investment objective. The first key step is to define your goals, prioritize them and then make a structured investment plan to achieve these goals.
4. Way of Investing: Lump Sum & SIP
There are broadly two ways of investing in mutual funds. You can invest a lump sum amount from the available surplus funds. Alternatively, you can also invest a fixed amount monthly i.e. start SIPs (Systematic Investment Plan). Either ways, the earlier you start investing, the more time your investments have to grow, and the magic of compounding to factor in.
5. Costs and Taxability
An investor must also keep in mind the costs associated with investing in mutual funds, like exit load and capital gains tax. Exit Load is the cost applicable on exiting investments before a certain period. This varies from fund to fund. Hence it is important to check the same. It is also important to understand the taxability of mutual fund investments, which varies by the asset class that you invest in.
In addition to the above factors, there is a lot of in-depth research, due diligence and analysis that needs to be done by a professional, before selecting a mutual fund. Hence, it is always advisable to take the advice of a qualified financial planner. He/she will understand your overall financial situation and select the most suitable investment option for you.
(By Amar Pandit, CFA, and the Founder & Chief Happiness Officer at HappynessFactory.in)