A mutual fund is a fund generated by some investors on a mutual consent which is then invested in buying securities. The investors expect high returns from these mutual funds after a particular time interval. But mutual funds can be tricky at times and might lead to losses if invested casually.
To help you trade this tricky territory here are a few pointers to lay your hands on the A game.
- Let’s start:
What you expect from the mutual fund investment should be crystal clear in your mind. Whether you want returns as soon as possible or whether you want a long term plan. Also, make yourself well acquainted with the risk factor so that you do not fall on shaky grounds. Plan beforehand if the investment is for a short term or a long term.
- Turnover ratios:
Portfolio Turnover Ratio (PTRs) is the measure of how frequently assets within a fund are bought and sold by the managers. Mutual Funds churn their portfolio to weed out bad stocks from their portfolio or exit from the fund, which has reached its target. PTR numerically measures the trading activity in a fund’s portfolio. It is the percentage of the portfolio that is bought and sold in exchange for other stocks. If the portfolio is churned many times during a year, the fund will incur higher transaction costs, which means a further impact on the amount you have invested in the fund. Larger Portfolio Turnover Ratio will increase the expenses while churning. When the fund’s expenses increase, it, in turn, reduces the returns or yields of the fund. Therefore it is advisable that investors consider Portfolio Turnover Ratios before deciding to invest in a mutual fund.
- A team that is experienced:
This is another major advantage of investing in a Mutual Fund. When you opt in for a Mutual fund scheme, your money is taken care of by a skilled fund manager. Fund Managers are experienced and skilled professionals, who conduct investment research and analyze the performance and prospects of various instruments before selecting a particular investment. Thus, by investing in mutual funds, you can avail of the services of professional fund managers, which would otherwise be difficult for an individual investor to avail of. A lot of people believe that they can time the market better, most fail due to the lack of knowledge and time taken to monitor and analyse each investment. As they say ‘Its best to leave it to the experts.’
- Diversification:
Diversification involves holding a wide variety of investments in different asset classes in a portfolio so as to reduce risks. Your portfolio of Mutual funds Schemes should be spread across investments in various industries and asset classes. If you invest most of your savings in a single security or a single type of security you are exposed to any risk that is inherent to those investments. Assume you have put all your life savings in the shares of XYZ & Co. and that company goes bust, your entire investment amount drops to zero, which is very risky. Thus in order to balance-out the risk factor, you need to diversify your investments. Over past 10 years generally a trend has been observed that most of the times whenever equities have fallen, gold has risen, so it may make sense to invest in both so as to offset the loss caused by investing in only one asset class. Thus, by investing in mutual funds, you can avail of the benefits of diversification.
- SIP to the rescue:
Due to lack of money, it may not be possible for a retail investor to buy a stock, however mutual funds allows them to invest in equities in smaller denominations. Further smaller denominations of mutual fund units enables investors to make periodic investments through SIP. A Systematic Investment Plan (SIP) is a vehicle offered by mutual funds to help investors save regularly. An SIP is a mode of investment whereby you, the investor, invest a pre-determined amount on a monthly basis, on a pre-determined date, into a particular mutual fund scheme, thereby building your savings over time. Today, it is the most common and conveniently chosen method of investing by retail investors.
