March 5, 2011 by akhilendra
How to choose a mutual fund?
Stock market has been moving in zigzag directions and it is very difficult for a average investor to catch it. So they often end up entering in wrong directions i.e. they either buy just before fall or sell when markets are about to rebound. With growing uncertainty in Indian market, mutual funds are gradually becoming favorites of many investors. Mutual Funds offer a very good opportunity to enter stock market with minimizing risk. But with growing number of investors, mutual fund houses are also gearing up to attract investors. They are offering wide range of products and now even selecting a good fund has become a challenge.
Choosing a correct mutual fund scheme from the basket of funds is like picking one among thousands. It doesn’t mean there are good and bad schemes, off course there are, but even picking the most appropriate schemes among good scheme is a huge challenge. It is very important to understand that there are many good schemes and we need to pick one the most appropriate one. And to do that we need to consider few important things;
Goal- The most important factor in investment across all instruments is Goal. It is the most important factor to keep in mind while shopping for mutual funds. whether you are going to invest for short term for example buying a car or for your child education. Time frame is the most important factor in investing. if time frame is more than 1 year but less than three year, go for a fund which invest in large blue chip companies. If you are looking for something for a long term, you can opt for a small and midcap companies.
Risk Profile– Risk profiling is one of the basic steps, one need to take before investing in any financial instrument. Mutual funds are comparatively safer than direct investment in equities but they too offer great amount of risk depending upon the kind of schemes you invest.So, it is very important to understand own risk appetite and then choose accordingly. Higher the risk , greater is the return on investment. Equity diversified funds are the most popular among all kind of funds available in market. Small and mid cap funds offer highest returns but are the riskiest funds available. Then comes, large cap funds which invest in large companies and they are the most balanced equity funds. They offer good returns and at the same time, offer good safety cushion. If someone is looking for a very short term and is not ready to take much risk on the invested capital, then go for short term debt funds. There are variety of other kind of schemes available in the market like Balance funds, funds of funds, Thematic equity funds, etc. One should always choose schemes after proper risk assessment.
Fund House and its past performance– Though it is often said that past performance is not a guarantee for the future performance but it is a very good indicator. In the recent past, we have seen lot of new fund houses flooding Indian market and it has become very difficult to choose the correct fund house even if we have a clear idea about the kind of schemes we are going to invest. While shopping for mutual funds, always look at the number of years a company has been in the industry, total asset under management and its past performance. Old and established fund house will offer better and consistent services.
Though no one can assure anyone of high returns, but by considering these factors we can generate optimum returns. Watch out this space for more information on this issue.
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