With the current scenario across the globe the share market remains so unpredictable and volatile that investors are skeptical about their mode of investment and the returns it will reap.
What is Mutual fund?
The mutual fund in simple words is just a mode of investment by an investor through a collection of stocks, bonds, and other securities and he owns shares which actually represent a portion of the holdings of the funds. Doesn’t that give one the feeling of ownership? They are easy to buy and sell and preferred by investors.
Some of the reasons Mutual funds are preferred are:
They are professionally managed and since we don’t have time and expertise to check on our portfolio, a great way is to have a manager managing your portfolio and manage investments.
Investing in individual shares or bonds is risky as the markets can turn bullish or bearish leaving shareholders completely at their mercy. By investing in a Mutual fund, your risk is spread over. There is diversification as your mutual fund covers a number of stocks and shares from other industries. One can gain and balance or rather minimize the loss of another.
Since it deals with buying and selling of group of stock or shares at a time it really turns around to be economical on the scale as the transaction cost as compared to individual buy and sell of shares will be much lower.
Liquidate into cash
Just like your other stocks, your mutual fund on your request can be converted into cash at any time. Having a mutual fund is cash on hand.
Types of Mutual Funds
A) Fixed income funds
- Monthly Income Plans
- Floating Rate Funds
- Money Market Mutual Fund
- Gilt Funds
- Debt Funds
B) Equity Funds
- Growth Funds
- Speciality Funds like Mid Cap funds or Small Cap funds
- Index funds
As we go ahead to invest in a mutual fund scheme, certain criteria we need to consider while selecting a scheme.
The objective of Investment
Simple and most important what is your objective of investment? The market is flooded with the different scheme at various levels from monthly income, a systematic investment plan to growth plans, income plans. Are you looking for a stable income on a regular basis or a huge one while selling of the investment or a consistent growth plan?
Tenure of Investment
Is your investment for short term or long term? If short-term then money market funds are advisable and if long-term like 5 years or so then equity funds.
Allocation of Assets
Important yet difficult to decide is the asset allocation. This depends on how much of regular income would you like to earn. If you have invested safely in PPF or other fixed income then opt for equity funds, if not and have hugely invested in shares then play safe and invest in debt or money market funds. If it’s high-risk sectors which are volatile then go for sectoral funds. If it’s large-cap stocks then invest in large-cap funds. The allocation of these assets depends on you and on the type of fund you would like to invest.
The hard earned money you are investing should generate good returns and definitely in good hands. So please do a thorough verification about your fund management team, your fund manager, the performance of the fund, at governance level issues, controversies, the fund house, stability of the staff working there, are they experienced and skilled. This is necessary because it is our money which we put at risk, it should be managed well.
Schemes risk profile
As they advertise all investments are subject to market risk. In fact, risks differ from scheme to scheme, so how much can you risk is what you need to evaluate.
Don’t rely completely on Past performance
We generally look at past performance but cannot completely rely on past performance for consistent returns as markets do not always remain the same.
Normally large size funds face the problem of underperformance, and small size funds cost higher, so play safe and invest in medium size funds.
Cost is definitely a factor as you are giving your portfolio to professionals to be managed so again wise thinking helps and investing in those funds whose cost can be recovered if you have invested in a fixed income fund.
The age-old and safe method of investment way back in 1774 by a Dutch Merchant is now the word on which many of us rely on for our investments. Investing in a mutual fund is kind of the new mantra reeling in everybody’s mind. Simply because it is able to achieve the required amount of diversification and there are earnings. To conclude be wise, play safe and invest in the Mutual fund to secure your investments.