10 things to check before investing in mutual funds!

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Mutual FundAre you planning to invest in mutual funds? Keep these ten simple but important points in mind, before making the investment.

  1. Existence

One should as an investor ensure that the mutual fund you are planning to invest-in has been in existence for a decent period of time. As investing in newly established funds is generally considered riskier as compared to a Fund which has already proved its existence. The reason behind this is that there is no history to be tracked for these new funds.

  1. Background check about the Fund Manager

A check over the experience of the fund manager may ensure that you have given your hard earned money incompetent and deserving hands. A fund Manager with expertise in Finance and ethical history will be an ideal candidate.

  1. Review the MF scheme and investment style

After having done with the evaluation of the fund manager, what is the broader investment style of the scheme should be well recognised. A scheme which is aligned with your objective and is in line with your risk profile, is the scheme in which one must opt for.

  1. Access the AUM

The fund with large asset size generally gives the investor confidence that a large number of people have shown confidence in the fund and have subscribed to it. Although, there is no link of asset size with future returns/performance, it does apparently boost the investor sentiment of the investor.

  1. Check the Investment Allocation

One should check where is the money actually being invested in? Is only debt or debt + equity or only equity? And in that too in which bifurcation. The choice of asset class is very important and it should have features aligned with the investment objectives.

  1. Fund’s historical performance

Watching at past performance of the fund is important in analysing a mutual fund. But Note that, past performance is not everything, as it may or may not be sustained in the future and therefore, it should not be used as the only parameter to select a mutual fund.

  1. Entry and Exit load

An entry load is the charges put on you at the time of joining the Fund and exit load is charges levied when you sell your units of a mutual fund within a particular tenure. As entry and exit load is a fraction of the NAV, it eats into your investment value. Thus, it is imperative that you invest in a fund with a low entry and exit load, and more importantly, stay invested for the long-term.

  1. Volatility Measure

One should check returns given by a fund during different time periods and compare them with a benchmark, usually an index and other funds in the same category. This will help you to know how volatile is the fund as compared to other funds and if it is correct fund for you, considering your investments attributes.

  1. Opportunity cost

Opportunity cost refers to a benefit that you as an investor could have achieved if you hadn’t to take this course of action. Basically, it means checking out returns of other avenues of investments which you can invest in instead of investing in the fund.

  1. Inquire about the taxation effect

It is important that one inquires of the tax liability arising from a particular scheme before one plans to invest its money in it.  As it is necessary for you to be aware if your investments will tax-free or taxed? And if taxed then how much is the amount? And what will be the overall effect of it, in terms of returns.

The views expressed in the article are of Abhinav Angirish, Managing Director, Abchlor Investment Advisor Pvt. Ltd.

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