7 things to consider before you invest in Mutual Funds

For less savvy investors, who do not want to do research and track their investments rigorously, Mutual Funds have emerged as a popular mode of investment. Mutual Fund companies pool money from a group of investors and employ professionals who invest on their behalf. This investment happens lump sum or through Systematic Investment Plan or SIP Investment. The Mutual Fund industry has grown rapidly recently.

Hence, before you rush to invest in them, you should consider a few things to understand which is right for you.

Fund category

Find the right fund category. The market regulators define many categories. Funds in some categories invest in Large-Cap Stocks, some in Small-Cap Stocks, while others could beMarket-Cap agnostic (called Flexi-Cap). Some funds only focus on a specific sector or theme, for example, funds investing in the IT sector or shares of public sector undertakings (PSU). Some funds invest in Bonds only.

Pick a category that fits your requirement and risk profile. For example, if you are young and can take high risks, check outSmall-Cap Funds. Balanced Advantage Funds are for those who seek safety and modest capital appreciation.

Objective

Next, focus on the objective of the fund. Every fund, irrespective of the category, has a purpose. Some may prefer taking high risks for significant returns, while others may be conservative with their approach. Even within one category, the objectives of funds may vary. For example, under theFlexi-Cap category, some funds invest in foreign stocks while others stick to domestic ones.

Similarly, you may seek to create wealth in the long term while othershave a medium-term horizon. Find a fund objective that matches yours.

Risks

You also need to look at risks associated with the funds you considerinvesting in. Concentrated portfolios, like sectoral funds, are by nature riskier than, say,Balanced Advantage Funds, which allocate money in both Equity and Debt.  Try to find how much risk you can take and then pick the right fund for you.

For example, if you are within 30s and do not require the invested money in the near term, a relatively risky fund is rewarding. Conversely, if you are close to your retirement age, capital conservationgets more important for you.

Fund track record

Even though there is surety that the past performance of a Mutual Fund scheme results in a similar performance in the future, going through fund performance history is a must. When looking at past performance, try to understand how this fund did, not just during the good times when money-making was easy, but when the market faced a downtrend. If a fund has managed to withstand losses in the falling market, it means its basics are covered right.

A resilient fund is not only which is good at making money for investors but is also good at protecting the capital.

Expense ratio

This is simply the commission that Mutual Fund houses charge for managing your investments. Asset managers deduct their commission from the deposits you make, so they get charged a commission no matter if you make a profit or loss. Hence, you need to be wary of this. The higher the expense ratio, the more it eats away your capital.

Fund manager

Once you have shortlisted the funds after going through mentioned steps, try to read about the fund manager before making final decisions. Find their profile and check their track record. See what funds they have managed in the past and how they performed. Find their interviews and try to decipher the thinking behind their investments.

SIPs create discipline

Automated investment through SIP Investment teaches discipline. You also benefit from market volatility with such a method. When the market goes down, you higher units for the same price. This brings down the overall investment cost. This concept is Rupee Cost Averaging that generates better returns in the long run.

Disclaimer – ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. – ICICI Venture House, AppasahebMarathe Marg, Prabhadevi, Mumbai – 400 025, India, Tel No : 022 – 6807 7100. AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.Please note, Mutual Fund related services are not Exchange traded products and I-Sec is just acting as distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein mentioned are solely for informational and educational purpose.