Want to become rich? Keep these 10 factors in mind while investing in mutual funds

How to become rich is one of the most commonly asked questions by investors from fund managers or investment advisors. When it comes to mutual fund investment, what investors look at is returns while they ignore some very important parts. According to the tax and investment experts, the risk involved is captured by the modified duration of the fund and Credit risk: Risk of decline/loss owing to change in the credit profile of an issuer that leads either to a downgrade or default. They listed out some focus areas that an investor must look while investing if they want to grow rich or maybe crorepati in with paltry investment of thousands but in the long-term perspective.

Arun Kumar, Head of Research at FundsIndia said, "There are two major types of risks associated with a debt MF — Interest rate risk: Risk of decline/loss owing to changes in interest rates. This risk is best captured by the modified duration of the fund and Credit risk: Risk of decline/loss owing to change in the credit profile of an issuer that leads either to a downgrade or default."

Kumar of FundsIndia said that a good way to construct a debt mutual fund portfolio would be to classify into three buckets:

1] Cash Bucket: The purpose of this bucket is for immediate cash requirements. Overnight and Liquid fund categories can be considered.

2] Core Bucket: This portion should be the majority of allocation and should have funds that are low on both duration (interest-rate risk) and credit risk.

3] Outperformance Bucket: This is the portion where you try to add on higher returns over and above the core bucket returns. Long/active duration (higher duration to capture decline in interest rates and vice versa) and credit risk funds (higher yields via lower-rated papers).

Asked about the major factors that a mutual fund investor should keep in mind Arun Kumar listed out the following 10 factors that an investor should keep in focus while investing:

1) Net YTM = Yield to Maturity – Expense Ratio;

2) Credit Quality;

3) Concentration Risk;

4) Modified Duration;

5) Average Maturity;

6) Fund Size trend – Avoid very small funds + check for sharp fall;

7) Exit Load;

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8) Historical NAV movement;

9) Past Returns; and

10) AMC Reputation and Track Record.

Speaking on the debt mutual fund returns Kartik Jhaveri, Manager — Wealth Management at Transcend Consultants said, "A debt mutual fund investment gives around 8 per cent return in the long-term perspective. However, if there is a good fund manager who has the ability to outperform the market performance with a huge margin then the return can go to the tune of at least double-digit."