Mutual Funds: This is what you need to keep in mind while picking a fund

Investing in any financial instrument is not as easy as it sounds. In fact, when it comes to money, nobody likes to take any chance. 

But, should that "fear" of loosing money stop you from investing? No, it shouldn't.

To balance out the risk factor, Mutual Funds come into picture. 

Mutual Funds is still a new financial product for Indians but now the awareness has been increasing due to various educational/awareness creation initiatives as well as due to ‘Mutual Fund Sahi Hai’ campaign. 

Sharing a data, Amol Joshi of PlanRupee said, on data points, total banking deposits in the county are in excess of Rs 100 lakhs crores and mutual funds manage just over Rs 20 Lakhs Crore, making mutual funds about 20% of total banking deposits size.

Though Mutual Funds has been managed by experts, one as an investor should also know how to pick a fund.

Sharing few tips, Ajit Narasimhan, Category Head - Savings and Investments, BankBazaar.com said, "Pick a good fund with a healthy track record and stay invested for the long term. Don’t merely look at short-term performance while choosing a fund. If a fund has underperformed in the short term, examine the fund’s holdings and check the reasons for under performance. Do not take hasty decisions while reviewing the scheme."

Moreover, Mutual funds come with administration and fund management charges. Higher the charges, lower your gains. So evaluate the expense ratio of the fund before you invest.

Further, another factor which needs to be looked at is the "Risk appetite".

Giving an example Joshi said, "For instance in Equity MFs; markets being at an all time high, returns across all time frames (1 year, 3y, 5y, 10y) look positive. It however must not be ignored that equity markets can be volatile and in such phase the investments may actually show negative returns. 

"Now, over long term equity markets do recover and so does an investment, but the difficult phase of negative returns needs strong conviction and staying power. Lower NAV is temporary loss (loss on paper only), if one sells during down phase it becomes permanent loss. Hence commit to equity MFs knowing your risk appetite and only for medium to long term goals," Joshi added. 

The last factor which needs to keep in mind is the "asset allocation".

Research has proven that asset allocation contributes largest part of return over long term. Get your asset allocation right, in terms of Debt and Equity percentage. 

In your 20s and 30s, long-term equity should be a major part of your investment portfolio. However, as you near retirement, you should move to debt funds.

So, invest in mutual funds wisely and pick up your fund which suits your goals the best. 

ALSO READ:

• Despite banks reducing deposit rates, Mutual Funds are a good investment option
• Mutual Funds: These 5 funds gave over 100% returns in five years
• Mutual Funds: Lump sum or small amount, which one should you choose for long-term investments?