5 Questions You Must Ask Before You Invest in a Mutual Fund
Investing in direct mutual funds is a riddle with different opinion, perception; also, surrounded by myths. The reality check gets buried whilst mutual fund advisors or distributors end up providing you with their insight about the fund(s). To know more about the things to be taken care before investing in mutual funds, take a read. Here:
Question 1: The Objective of the Investment: Finalizing your goals and objectives is mandatory before selecting the mutual fund. Also, make sure you are clear about your risk-appetite, horizon, and expected returns are well-defined, especially for starters.
Question 2: Average Annual Return: It is advised to check the average returns for the last 10 years of the mutual fund you are thinking to invest in. Returns over long-lasting provide a better picture of stability of fund, the performance is measured accordingly. Additionally, one should get the historical performance of both up & down market. Precisely, this is the test of active management.
Question 3: The Expense: The expense is important to manage a fund which is somehow determined by the expense ratio. Also, it is one of the important perimeters one should look whilst selecting mutual fund scheme. An expense ratio is the percentage of assets that is towards expenses such as commission, brokerage, distribution, etc. Everytime a fund manager churns her/his portfolio, a brokerage fee is paid borne by investors as a form of expense. This also affect the fund’s returns effectively. NOTE: Better to have a low expense ratio, this will help in the longer-term.
A Bit More About Expense Ratio:
Expense ratio, also, known as Annual Fund Operating Expenses is the percentage of assets that is payable to the fund manager.
The fund manager with the help of a team of experts and analysts, manage, allocate & advertise the fund to manage risks and maximize returns. But, if the fund’s asset is minimal, the expense ratio can be high, reason being, the fund has to meet its expenses from a smaller or restricted asset base. Uniformly, if the net-assets of the fund are significant, then the percentage of an expense ratio should come down ideally.
Question 4: Tax Benefit: ELSS is a category of mutual fund that provide tax-benefit(s) under section 80C of the Income Tax Act. Although, these funds come with a lock-in-period of 3 years. Furthermore, you can read a bit about ELSS funds here:
Equity Linked Saving Scheme (ELSS) are mainly diversified equity mutual fund scheme with two distinguish features- investment amount in them qualifies for tax benefits under section 80c of the Income Tax Act, 1961 up to a limit of RS 1.5 lakh a year and secondly, the amount invested has a lowest lock-in-period of 3 years. It mainly invests a large chunk of your money in equity related securities. The fund manager looks for securities of companies which have a strong growth potential and a sound business model.
Question 5: Close-ended or Open-ended Fund: It is important to ask your advisor if the fund is an open-ended or close-ended fund. Also, the redemption is allowed only in open-ended fund.
Looking to invest? Hop on to gulaq.com and start investing in direct mutual funds. Furthermore, you can also get in touch: [email protected]
*Disclaimer: investment in securities market are subject to market risks, read all the related documents carefully before investing