Planning to invest in mutual funds? Make note of these five factors

So, before you choose the mutual fund that is “right” for you, it is imperative to give careful consideration to a number of factors such as investment goals, risk tolerance, performance history, and expert management, among others. 

“Investing in mutual funds is a great way to grow your wealth. However, with so many options available today, it can be overwhelming to select the right one. To make the right choice, it’s important to align your investment goals and financial objectives with the mutual fund’s offerings,” says Deepak Gagrani, Founder of Madhuban Finvest.

Before investing in a mutual fund, make note of these five factors: 

Risk appetite

Before opting for an asset class and the category of funds, one has to choose the fund based on the risk appetite. For instance, an investor with a high-risk appetite can opt for a higher allocation to equity.  

“If someone is 25-years-old, then they can choose a 70-30 ratio between equity & debt. And within equity, they can invest up to 40 percent in the mid and small cap and 30 percent in the large caps,” says Sridharan S., a Sebi-registered investment advisor and founder of Wallet Wealth. 

Conversely, if their risk appetite is lower, they can invest up to 40 percent in the large caps, and only 30 percent in small & mid-caps regardless of the market cycle.

But how can you evaluate your risk profile? Here is a piece of advice for you. 

“Assess your risk tolerance by considering your comfort level with market fluctuations and potential losses. If you can tolerate more risk then you should invest in equity mutual funds, if you can tolerate medium risk then you should invest in debt mutual funds and so on,” says Neelabh Sanyal, Founder and COO of Kuvera.

Time horizon is vital

It is also imperative for investors to invest in a systematic and not in a haphazard way.

“Overall fundamental strategic asset allocation works better over a long period. When the downside happens, they should use the time for unit accumulation. This helps average out the cost,” Sridharan adds. 

“Key factors to consider include your risk profile, investment duration, liquidity, and tax impact. Additionally, it’s important to research the fund management team’s track record in terms of performance and overall investor-friendly approach,” Mr Gagrani adds. 

Past performance 

Some experts opine that the decision of choosing a fund should, among other factors, be based on the past performance and size of the fund.

For instance, when a fund has delivered good returns in the past, it becomes a sought-after among the retail investors, though its future returns are not guaranteed by any measure. 

“Investors should analyse the past performance of mutual funds by examining their historical returns and comparing them to relevant benchmarks. However, one should remember that past performance is not a guarantee of future results,” says Neelabh Sanyal, Founder and COO of Kuvera.

Size of the fund

Experts believe that a larger asset size of a fund can bring stability, economies of scale, market influence, and diversification opportunities. 

“Investors often consider AUM when evaluating investment providers, but it should not be the sole factor in decision-making,” Sanyal adds.

Portfolio diversification

In order to earn higher returns, investors should not invest heavily in one asset class or category of funds. They should, ideally, diversify their investments into numerous categories and asset classes to hedge their risky investments by investing into fixed income, or debt instruments. 

“Investors should explore the importance of diversification by investing in different asset classes and market sectors. This strategy helps reduce risk and increase the potential for consistent returns,” adds Sanyal.

Note: This story is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment related decision.

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Updated: 19 Oct 2023, 01:54 PM IST