Hi, whenever we think to invest in mutual funds, we are confused about which one to invest People normally look at the past returns and decide the mutual fund they invest in.
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But we should not expect the same returns in the future based on the past ones Equity mutual fund returns are directly based on the performance of the stock markets and with that, how the stocks performed in which the mutual fund is invested in, So before investing in any mutual fund, what all factors need to be considered, we will discuss today, so let us start.
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The first factor is what are your investment goals, some invest to buy a home or a car, and some for retirement planning When you know your investment goal, you would know the duration and the risk you can take.
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If your duration is longer and don't have immediate needs, you can take up the risk and can invest most of your corpus in the equity market because equity is volatile in short-term. If you have a goal of buying a car in 3 years or a specific need, you need to protect your capital more than returns in this case, you can invest most of your corpus in debt mutual funds. These have less returns but are safer as compared to equity mutual funds.
The second factor is performance against a benchmark, every mutual fund keeps a benchmark against which you can compare your fund. But, an important point is that, which benchmark do you choose? Many times people compare small and mid-cap stocks to Nifty 50 which is wrong.
Because Nifty 50 consists of large-cap stocks and the risks are comparatively lower than small or mid-cap stocks. Small and mid-cap will obviously beat Nifty 50 because the risk is higher. When you invest in a mutual fund through Groww, we display the industry average and rank within the category. So that you can have an idea of how the mutual fund has given returns in its category.
The third is fund manager experience and AMC track record. You should know the fund manager and their past record of the mutual fund. You can look the fund manager of any mutual fund and other funds managed by them on Groww app.
As we said earlier, you can compare the category average returns and relevant benchmark index and with this, you need to see the consistency of performance of the fund manager And how do they protect your downside in a bear market and how they generate good returns in a bull market and to check the track record of the AMC is also very important, these companies manage mutual fund schemes.
For example, HDFC top 100, small-cap fund, Flexi cap fund etc, are managed by HDFC AMC
And mostly the stock investing decisions are made by the AMC level, wherein that stock is present in many funds that is why it is important to check the past record of the AMC as well.
The fourth factor is the expense ratio, it is an annual fee charged for admin, promotion, distribution. The expense ratio is less in direct plans as compared to regular plans. That is because mutual funds do not have to pay any distribution costs in direct plans.
We should compare the expense ratio of the mutual fund in the same category. The expense ratio is the cost of the mutual fund, the lesser it is the better Generally, if the expense ratio is more than 1.5%, it is considered to be high.
It is calculated on the total fund value, so if it reaches 1%, your profit can be reduced by 10%. The fifth factor is mutual fund rating, Groww app shows all ratings on all the mutual funds.
This rating is between 1 to 5, and the higher the better. This rating is calculated by comparing the risk-adjusted returns of the mutual funds. Risk-adjusted return is how much the fund took up rik and what were the returns against it.
Meaning a mutual fund generated high returns, but it too very high risks to achieve that. So its risk-adjusted returns would be comparatively lower than its peers in the same category. So these were the 5 factors every investor should know before investing in mutual funds
This article is for educational purposes only, there are no buying/selling recommendations
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