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How to Invest in Mutual Funds

Mutual Funds

So, you want to invest in mutual funds. After you recognize what your risk tolerance (need) and your risk capacity (budget) levels are, and after you do the research on the mutual funds you can invest in, you can choose the one that suits your needs the best. So, read on and find out how to invest in mutual funds and gain more returns.

The first thing to do is check if you have similar investment objectives as the fund, for example: fixed income or equity, general equity or sector-focused, high risk or low risk, blue-chips or turnarounds, long-term or short-term liquidity focus. In order to compare its stated objectives and peer group you have to evaluate its past performance and see if it has been a winner or a loser. You can make your own research and find out which mutual funds have been among the top ten best performing funds in the period from one to three years. Now pick two or three funds, and split your investment.

Next, you should check how big the fund costs are. These include management fees, annual expenses of the fund and sales loads, which can take away a significant portion of your returns. Let’s not forget about the fee a fund charges for getting in and out of the fund. Ask about the taxes, so that you don’t get surprised later on. They are sometimes required even for mutual funds that have declined in value. And even if you don’t sell your fund shares, you might still have to pay the taxes.

You should definitely consider investing in index funds. They are passive funds, but they charge lower expenses and they are more tax efficient, without the risk of the fund manager making sudden changes you don’t agree with.

Be careful to avoid investing in mutual funds with an asset base of less than Rs 25 crores. Instead, invest in funds only after they have established a track record. And remember to try and avoid new funds.

After you have invested, you should regularly, once in a quarter, review mutual funds you invested in to see if management and performance is in line with stated objectives and also whether its performance exceeds or lags your expectations. Then you can decide whether to hold or to sell your investment. It will help if you follow the same principles to review as you did to choose the mutual funds to invest in.

After some time, you may want to change your investment plan. The reason could be that you want to change a type of fund, or you might just want to take more or less risk. It stands to reason that if competitors continue to be more successful, its time to think about some change.

Now, as you see, investing in mutual funds isn’t something you do and forget about. It’s something you begin doing and get more and more interested in as time goes by. Our several pieces of advice give you a place to start, and you will see what is best for you as you go on.

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