Mutual Funds: 5 important factors that you must check before investing

When you visit the New Fund Offers (NFOs) page on the Association of Mutual Funds in India (AMFI) website, you’ll notice numerous mutual fund companies eagerly launching a range of new offerings over the past two months. This surge of NFOs reflects investors’ optimism fueled by the current bull market.

Mutual funds have become increasingly popular among investors due to their effectiveness in long-term wealth creation. This popularity underscores their appeal as a valuable option for many investors. The latest AMFI data released in June this year shows a notable increase in mutual fund investments, indicating growing participation among investors.

Hitesh Thakkar, Acting CEO, ITI Mutual Fund, said, “The mutual fund industry’s net assets under management (AUM) increased by 3.8 per cent to ₹61,15,581 crores at the end of June 2024, as against ₹58,91,160 crores as on May 31, 2024, as per data released by AMFI. The total folios count is at an all-time high in June 2024. We have observed consistent positive inflows in equity schemes since April 2021."

"I believe India is one of the fastest growing economies in the world. There will be a huge wealth creation opportunity in the coming five to seven years. This will lead to significant growth of the upper-middle-class, HNI, and ultra-HNI populations. Mutual fund is one of the preferred, transparent & cost-effective investment products in India and is well accepted by retail investors. The trend is positive for the mutual fund industry’s future growth. There are chances that the industry will cross the milestone of ₹100 lakh crores AUM by 2030, he added.”

Factors necessary for consideration

Nevertheless, conducting due diligence is crucial before investing in any mutual fund. It’s essential to pay attention to critical aspects such as investment objectives and strategies, fund performance, quality of management, fees and expenses, and the types of assets the fund invests in. Above all, delve into the fund’s investment process and verify if the strategy aligns with your financial goals. As an investor, you can enhance your confidence in selecting a mutual fund that matches your investment goals and risk profile. However, it’s necessary to thoroughly examine specific factors before committing your money to mutual funds.

Financial goals

Do you know your investment objectives? Clarifying your investment goals is akin to establishing a destination before embarking on a journey. It is crucial to select the appropriate mutual fund that not only aligns with your risk tolerance but also suits your investment timeline. The investment horizon of a mutual fund denotes the duration it targets for achieving returns. Opting for a fund with a corresponding horizon to your goal can effectively manage risk.

Understanding your goals enables you to select a fund with an appropriate investment strategy. For instance, a growth-oriented fund could be ideal for a long-term retirement objective, whereas an income-focused fund might better serve short-term financial needs.

When making decisions about your next mutual fund investment, it’s crucial not to be uncertain. Having a clear strategy or direction is essential for determining where you want to allocate your funds next. Defined goals provide motivation and, during market fluctuations, remembering these goals can maintain discipline and prevent impulsive decisions.

Type of fund

The type of fund you choose is significant. Making decisions based on rumours can have serious consequences. Above all, comprehending the various types of mutual funds is essential for selecting those that best suit your investment portfolio.

As an illustration, equity mutual funds primarily invest in stocks, aiming for potentially high returns but also exposing investors to higher risks due to fluctuations in the stock market. Debt funds invest in fixed-income securities such as bonds, focusing on generating regular income and preserving capital, typically carrying lower risk compared to equity funds. In comparison, hybrid funds combine equity and debt investments to strike a balance between risk and return. The exact mix can vary based on the fund’s objectives.

Consider thematic funds if you have a strong grasp of a specific sector and its long-term prospects. These funds concentrate on a particular industry or theme, such as technology or healthcare, providing focused exposure that could yield higher returns. However, they also entail a greater risk if the chosen theme loses popularity.

Fund performance matters

Past performance serves as a valuable data point in mutual fund research, yet it must be interpreted and utilized correctly. Examine the fund’s returns across various time frames. This provides insight into its consistency and performance under different market conditions.

It’s important to prioritize consistent returns over singular high numbers. A fund that shows steady growth may be a more prudent choice than one with volatile returns. Additionally, comparing the fund’s performance to its benchmark index, which serves as a standard for similar funds, helps evaluate the effectiveness of the fund manager’s portfolio management.

Next, evaluate how the fund compares with others in its category. This helps pinpoint top performers with similar risk profiles. Keep in mind, a fund’s past performance doesn’t assure future outcomes. Market conditions and management strategies can evolve, so it’s essential to go beyond raw returns. Assess risk-adjusted returns as well, which reflect the level of risk taken to achieve those returns.

Load structure

Consideration should be given to exit loads when selecting a mutual fund. The mutual fund company will charge you an exit load if you redeem your units before a certain amount of time. This expense represents a monetary fine for an early withdrawal. If you need to redeem your investment early and the fund imposes an exit load, it can diminish your returns.

Fund’s expense ratio

Mutual funds levy an expense ratio, which represents the annual cost of managing the fund as a percentage of its assets. It’s a critical consideration when selecting mutual funds because the expense ratio is deducted from the fund’s assets, directly influencing your returns. Opting for a fund with a lower expense ratio means more of your money remains invested, potentially enhancing growth over time.

Little variations in your expense ratios can have a big impact on your long-term profits because of compound interest. Select funds with lower expense ratios when comparing ones with similar attributes. The results of your investments may significantly change depending on this choice.

By adhering to the aforementioned steps and conducting comprehensive research, you can enhance your prospects for success with mutual funds and embark on a fulfilling investment journey.