Everyone suggests investing in mutual funds through SIP (systematic investment plan) or Lump-sum, but the question arises how to decide the better funds for your goals. It is important to choose the right plan to gain the most out of it. You and I want better returns on our investments but only returns factors matter to decide a fund.
Mutual funds have become an important way for many Indian buyers to build wealth. However, because there are so many choices, picking the right fund can be hard. Do not be afraid! This complete guide will try to give you the information you need to make smart choices and pick mutual funds that fit for your savings plan, financial goals, and risk taking capacity.
Understanding Your Investment Persona
First you need to create a persona for yourself and outline answers of few questions such as: –
- Are you saving for retirement, a child’s education, a home, or wealth creation? Different goals have different target time periods and risk tolerances.
- What is your long term target? Do you want to stay invested for 3 years, 5 years, or more than 10+ years.
- How much risk you can take. Do you want higher returns with higher risk or stable returns with lower risk? Do you want dividend funds which keep giving passive income?
- How much can you realistically invest regularly? Consistency is key to building wealth through mutual funds.
These factors and questions help you in finding the better funds for yourself and avoiding getting into others’ unnecessary advice.
Essential Parameters to Evaluate Mutual Funds
Once you understand your investment persona, you are ready to search mutual funds for yourself. For that here are the crucial parameters to scrutinize:
- Fund Type: There are usually three types of funds where mostly people invest. – Equity funds invest in stocks, debt funds in fixed-income instruments, and hybrid funds in a combination of both. Choose a fund type that aligns with your risk appetite and goals.
- Investment Style: Does the fund follow a large-cap, mid-cap, or small-cap strategy? Large-cap funds invest in established companies, offering stability, while small-cap funds focus on emerging companies with higher potential but greater risk.
- Expense Ratio: This fee, expressed as a percentage of assets i.e., your investment amount, covers fund management and operational costs. Lower expense ratios translate to higher returns for you. You can check the expense ratio before investing.
- Past Performance: While past performance is not a guarantee of future results, it provides some insight into the fund manager’s skills. Analyze the fund’s performance over different market cycles.
- Fund Manager’s Experience: Research the fund manager’s track record and investment philosophy. Choose a fund with an experienced manager who aligns with your investment approach.
- Check company’s rating: You should always check fund companies’ reputation and review allotted by the mutual fund distributor like PayTM, Groww, ETMoney, Upstox, etc., Also check whether these mutual fund distributor apps charge you extra for investment in mutual funds or not. This cost is other than expense ratio.
- How long they are in this field: Check the company;s asset under management value. This will give you an idea how many people have invested as this increases asset under management (AUM) value of the funds.
Tips for Success
- Diversify Your Portfolio: Don’t fall into the greediness of higher returns. You should always try to diversify the investment like ELSS, Mid Cap, Small Cap, Debt funds, Gold, etc. Investing in a mix of funds across different asset classes mitigate the risk of investment.
- Stay Invested for the Long Term: Market fluctuations are inevitable. Stay invested with a long-term perspective to ride out market cycles and benefit from compounding.
- Review and Rebalance: Regularly review your portfolio performance and exit if you don’t find it good or you have knowledge of other investments plans and rebalance your portfolio. Consider seeking professional financial advice for a personalized investment strategy.
Explore funds here – List of Mutual Funds (not promotional and no referral link)
Use our Financial Planning Tool for your Monthly Investment
How to invest
You can download any apps like PayTM money, ETMoney, Groww, Upstox, Zerodha Coin, or any other you are comfortable with.
You need a PAN card to register, link your bank account and start investing. Then, you search for different funds available with them based on the above analysis. I am not promoting any app, you can use any which you find easy-to-use and can manage your own.
Conclusion
A key part of reaching your financial goals is picking the right mutual fund. You can feel confident when navigating the world of mutual funds if you know what kind of investor you are, carefully evaluate funds based on key criteria, and stick to a strict spending plan.
Don’t forget that information is power. Use the knowledge in this guide to give yourself the tools you need to start making money through mutual funds.
