Though mutual funds are a profitable and popular investment choice, not every mutual fund guarantees profitability over the long term. There are various factors which influence the performance of mutual funds, like market conditions, risk profile, fund management etc. Do thorough research and analyzation before investing in a mutual fund

In this article, we’ll discuss all about mutual funds:

Understanding Mutual Funds

Mutual funds are a investment instruments that pools money from multiple investors and invests it in a diversified portfolio of stocks, bonds, or other securities , Mutual funds are managed by professional fund managers who make investment decisions based on the fund’s objectives. By Investing in mutual funds you can generate wealth and be able to beat inflation

Advantages of Investing in mutual fund

There are various advantages of mutual funds some are listed below :

Liquidity – No Doubt Mutual funds are highly liquid assets unlike real state which you can redeem according to your will ,which can very useful in case of an emergency or need of cash

Professional Management – Rather than timing the market and going though all the stress of the market or acquiring knowledge of picking stocks, leave it to a fund manager which will take care of that

Low Risk – Funds like Debt Mutual Fund invest your money in government securities and bonds which may give you less return than Equity mutual fund but are less volatile and less risky

Low Cost – Unlike real state or gold , you don’t need a large amount of money to get started , you can start as low as rs. 1000 /- p.m.

Long term Investment – no matter how many times the market crashes , it will always bounce back and if you remain invested in a good mutual fund it will generate you wealth (see the image below).

In this picture after the great 2008 and covid-19 crash 2020 as highlighted ,the market always bounces back and hits a new high. This means it will generate higher returns

How to select a Good Mutual Fund

There are over more than 5000 mutual funds schemes in India , so choosing a right mutual fund to invest is a must , here is a checklist you should have before investing:

Returns – You should see CAGR of at least 5 years and should not see absolute returns , In case the fund has not been able to beat its benchmark over three, five, seven or ten years, it is reasonable to believe that the fund might not be a good investment.

Risk Appetite – Before investing in a mutual fund , the investor must know their risk appetite to examine whether to invest in equity mutual fund or debt mutual fund

AUM (Asset Under Management) –  AUM means total assets that are being managed by a mutual fund scheme. A larger AUM indicates a larger fund corpus from the collection of funds from investors and also indicates that more investors are involved.

Fund Manager – The Fund Manager should be well experienced and if you are a Naïve investor avoid NFO’s (new fund offer) , let the new fund manager prove their expertise in the market first

Expense Ratio – The Expense Ratio is the fee charged by the investors for the proper management of their investments. As an intelligent investor, you should choose mutual funds that have a lower expense ratio. This is because, the percentage may seem quite small but can have a big impact on overall gains

Before you invest in a mutual fund

Now you have seen how to invest in a mutual fund , now you must remember these points before you invest in a mutual fund

Past Returns do not guarantee future returns – The Market is very volatile and uncertain and it may happen the best performing fund can be underperforming and the underperforming fund can outperform the best funds

Do not choose Regular Plans (instead go with direct plan) – if you choose Regular Plan then the distributer will also charge its fees in addition to Expense ratio , the percentage might seem small but it’s impact on overall profit is quite big

Investing for long term – The most important Reason for investing for long term is Power of Compounding where returns are reinvested, leading to exponential growth of the investment over time.

Beta – Beta tells you how much volatile that particular fund or how much risk that fund is taking is – an ideal beta should be less than 1.

Bonus Tip

If you want to invest in Large Cap mutual fund just because of the lesser risk involved in these funds, consider investing in index funds as the stocks will be chosen from the top 100 companies only ,then rather than giving fund houses an expense ratio , invest by yourself in an average pool of top 100 companies, an expert advice from fund manager is needed when the risk is large i.e. when you are investing in small cap or mid cap funds

Conclusion

As answered above every mutual fund is not profitable for long term , choosing a mutual fund is time taking process but once you pick the best one ,it will generate you wealth and you will be able to fulfil your goal

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