5 things to consider before buying mutual funds for the first time

In an effort to assist you in choosing the right mutual fund as a beginner, we have complied 5 things that you keep in your checklist.

Oct 16, 2020 10:10 IST India Infoline News Service

Investment in mutual funds is one of the better options available to you as an investor. Mutual fund gives you chance to invest in stock market, debt market, call money market, government securities, overseas market and commodity market. In short mutual funds gives you access to diverse assets in which you can invest as per your investment goals and risk appetite. There are various types, categories and sub-categories of mutual funds available to investors.  Which is why investing in mutual funds for the first time, can be a daunting task. In an effort to assist you in choosing the right mutual fund as a beginner, we have complied 5 things that you keep in your checklist.

1. Investment objective: Every mutual fund scheme, irrespective of the category - whether equity or debt has an investment objective. It is this investment objective which entails them to invest in various asset classes in defined proportions. As investors, it is imperative to check the investment objective of the respective mutual fund scheme, and thereby see whether it matches your end goal. For example, if you have an objective of capital appreciation with a long-term investment horizon in mind and are willing to take risk, then equity oriented mutual funds will work better for you.

2. NAV should not be the deciding factor: The concept of NAV (Net Asset Value) of a mutual fund is probably one of the most misunderstood in the investment universe. You cannot view a mutual fund unit like a share. An individual stock may get over valued if its price shoots up, but that is not the case with a mutual fund. It is irrelevant how high or low the NAV of a fund is. The amount of your investment remaining unchanged, between two funds with identical portfolios, a low NAV would mean a higher number of units held and consequently a high NAV would mean lower number of units held. But under both circumstances, the product of the number of units and the applicable NAV, which is the value of your investment, would be identical. Thus, it is the stocks in a portfolio that determine returns from a fund, the value of the NAV being immaterial. Investors may please note that in case of mutual funds schemes, lower or higher NAVs of similar type schemes of different mutual funds have no relevance. On the other hand, investors should choose a scheme based on its merit considering performance track record of the mutual fund, service standards, professional management, etc.

3. Always link mutual fund SIP to a financial goal:  All kinds of investing have to be goal-oriented in order to be fruitful. The same applies while deciding on SIP as an investment option. You need to be very clear about your financial goals. Investing in mutual funds can help you achieve your coveted financial goals. You must thus fix a concrete objective before investing in SIP. Are you investing for your retirement or the higher education of your children? Such clear objectives not only give you a direction to follow, but also give you a certain idea about choosing the right fund and amount for investment.For eg- Wealth creation is a financial goal. Once you are clear about what your goal is, you should start begin your investments. We all know that with our current and potential future income will not be enough to fulfil all our goals. Therefore, an accumulation of investments over a long period of time, preferably through SIP route powered with compounding, could generate the desired results.

4. Costs matter: An exit load is the charge levied when you sell your units of a mutual fund within a particular tenure. As exit load is a fraction of the NAV, it eats into your investment value. Thus, it is important that you invest in a fund with a low exit load, and more importantly stay invested for the long term.  There are other expenses like expense ratio, which need to be compared across similar funds.  Comparing the fund’s costs and performance against those of similar funds will shed light as to the kind of value you’re getting for your money.

5. Direct plans vs. regular plans: The plan you choose will lead to a significant difference in returns if you are planning to invest over the long term. Direct investments have low investment costs involved which reflect in marginally better returns for the investors. There are several online sites and apps where one can invest in direct mutual funds. However, it is only in times of volatility that an investor’s nerves are tested. And, it is in such times that the industry observers see SIP closures, which means direct investors stop buying when the markets are selling at low levels. It is in these times that an advisor can handhold the investor, reason out the benefits of long-term investing and rupee cost averaging and help him or her stay invested. So, while new investors are advised to go through a trusted agent, experienced ones may invest directly.

Related Story