Investing in mutual funds suits investors of all ages. Investing in them can result in wealth creation, and achieving different life-stage goals, e.g. retirement planning, children’s education, vacation planning, property purchase, or creating an income stream during retirement. But, before you start investing, one of the most important questions is how do you choose the right mutual funds?
Many factors go into mutual fund selection. They include return expectations, risk tolerance, and investment horizon. Selecting funds should consider expenses, past performance, manager experience, and assets under management. The following guide to mutual fund investment may be helpful when selecting mutual funds that align with your goals.
Table of Contents
Finding The Right Mutual Fund To Meet Your Goals
If you consider the factors below, you’ll be able to understand how to invest in mutual funds based on your financial goals, risk appetite, and asset allocation.
Investment Horizon
The time you have to achieve your financial goal depends on what you’re aiming for. If you want to pick the right mutual fund, it’s important to understand that equity funds work best for long-term goals, while debt funds are more suitable for short to medium-term goals.
For really short investment periods (less than 1 year), funds like overnight funds, liquid funds, and ultra-short duration funds are a good choice.
Investment Objective
To choose the right mutual fund, you must first know your investment objectives. What is more important to you: growth or regular income? For long-term capital appreciation, equity funds are best, while debt funds are better for regular income.
Risk Profile
Knowing your risk profile is the key to choosing a mutual fund that meets your needs. To ensure that you are taking the right amount of risk, it is important to know a scheme’s risk profile. Investors with moderately high to high-risk appetites should invest in equity funds, while investors with low to moderate-risk appetites should invest in bond or debt funds.
Taxation
Taxation is one of the most important criteria to consider when choosing a good mutual fund, as knowing the tax implications of your investments is essential.
Capital gains in equity funds are taxed at 15% on short-term gains (held less than 12 months), and long-term gains (held longer than 12 months) are exempt from tax up to Rs 1 lakh, after which they are subject to 10% tax.
If you hold your non-equity fund for less than 36 months, your short-term capital gains will be taxed as per the income tax rate, and if you hold it for more than 36 months, your long-term capital gains will be taxed at 20% after indexation.
Lump sum or SIP
Having selected the right mutual fund for your needs, you should learn how to invest in SIP online. SIPs, or Systematic Investment Plans, are among the most popular mutual fund investment options.
Investing in SIPs develops financial discipline and builds wealth for the future. SIPs allow you to start small and build a corpus gradually and systematically. By investing through SIPs, you can benefit from compounding and rupee cost averaging.
Investment Strategy
Investing strategy is often overlooked while identifying the best mutual fund. Nevertheless, it plays a crucial role in the success of your investment portfolio.
An investment strategy is also called an investment approach. It is the method by which fund houses make all their investment decisions. A conflict of interest will arise if the investment philosophy of the fund house is not aligned with yours. Ultimately, you will have to exit the investments at an unfavorable price.
Fund Performance
The performance of the fund is important. This ensures that the investments have gone through multiple market cycles. It would allow consistent returns over a period of time.
The fund might not be a good investment if it hasn’t been able to beat its benchmark over three, five, seven, or ten years.
When evaluating the performance of a fund, it is important to review the performance details of the fund manager. Fund managers with reasonable tenure and a proven track record would prove beneficial. You can track your fund’s performance with an online trading app.
Expense Ratio
A commission or fee charged by a fund manager for managing investments is called the expense ratio. Basically, it is a fee paid by all investors to the fund manager for ensuring profitability.
Investing in mutual funds with a low expense ratio is important. It may seem like a small percentage, but when calculated over your entire portfolio, it will be more significant.
Conclusion
It is crucial to consider the factors that go into selecting the right mutual fund for you. When choosing the right mutual fund, it is important to consider your risk tolerance, financial goal, investment horizon, etc. Once you’ve understood all the factors involved in selecting mutual funds, you’ll be able to choose the best one for you. However, if you need assistance with selecting a mutual fund or investing, you can rely on Kotak, a reliable partner in the financial industry.
