Everyone has various goals that one aims to accomplish. These goals may be sending your child abroad for higher education, buying your dream car, purchasing a family home etc. These goals require finances and in order to attain such large sums of money you can either save or invest. Saving is an important financial habit that you should develop regardless of your needs. However, investments are carried out for the sole purpose of wealth accumulation.
One such common investment instrument is mutual funds. They are considered as one of the more popular mutual fund investments. If you are planning to accumulate some excess wealth over and above your income, then here is your guide to how mutual funds work:
A mutual fund is an investment vehicle that pools in funds from investors who share the same investment objective. According to the stated objective, the funds are then invested in various assets. Such investments are usually carried out by Asset Management companies.
In accordance with your mutual fund objective, you can choose from the following common mutual funds:
- Equity Funds
- Debt Funds
- Money Market Funds
- Index Funds
- Fixed Income Funds
- Balanced Funds
- Speciality Funds
In order to understand the flow of the money in a mutual fund investment, refer to the diagram below.
Today, there are close to 40 organisations handling mutual fund investment worth Rs 10 lakh crore. With multiple options, it can become difficult to choose which fund you want to invest in. By following our 5-step guide, we can help you decide your next investment venture.
Check Past Performance – While analysing the funds one sure shot way to find out how your fund will perform is by looking at its past performances. Not just that, checking the credit history of the scheme, the fund manager, investment decisions etc will all add to an informed choice.
Risk Analysis – Before investing make sure, you have demarcated your room for rick and investment horizon. Choose a fund that matches the same amount of risk. Do not get lured by trying to diversify your portfolio too much.
Diversification – Check to see whether your mutual fund offers a certain level of diversification to your portfolio. This is essential because diversification ensures that the risk propensity is reduced.
Know your fund manager – Before choosing your fund manager make sure you do a thorough research of his/her past investment decisions. Evaluate the performance of the funds that the manager has handled.
Costs – A fund that costs higher should also yield higher benefits than lower priced mutual funds. Small differences in the fee can translate into large discrepancies in returns.