Mutual funds have become a popular investment tool. An economical means of investment, mutual funds provide diversified exposure to different securities, offer tax relief, and do not require in-depth knowledge of stocks or the stock market. Mutual funds are perfect for those who want to invest and earn from equities but are unequipped to handle stock market dynamics. For a beginner who wants to invest in mutual funds, it is essential to note the following aspects:
- Identify your goals and those of the fund.
It is essential to be clear about your investment goals and the returns you want. Different mutual funds have diverse and varying objectives, and the cap size, the combination of equities, maturity, etc., are based on these specific objectives. Investors must cross-check if the fund’s objectives are congruent with their goals and if the return will meet their milestones.
- Be clear of your risk appetite.
It is easy to sway away from one’s actual risk appetite when investing for the first time, especially if the market shows rising trends. As beginners, it is advisable to understand the actual meaning of market risks and the potential losses. One should not rush into making quick, short-term investments. It is even more important for beginners to choose a portfolio that combines debt and equity judiciously, considering one’s risk-taking ability.
- Know your funds before investing.
The purpose of mutual funds is to ease the process of investing. Though it is the fund manager’s job to ensure that your fund generates returns as per your expectations and does not go haywire, selecting the right fund is your responsibility. The first thing to decide is how much money you want to invest in fixed income securities and how much in equity. Next, you will have to decide how many funds you want to invest in and how – whether in a lump sum or a SIP and whether you want a direct plan or a regular one.
- Check the expense ratio and the exit load.
To finance a mutual fund’s operational expenses, an annual charge is levied called the expense ratio. This covers the cost of fund management, allocation fees, documentation charges, etc. Furthermore, to withdraw money, an investor may need to pay a charge called the exit load, depending on when it is withdrawn. Before shelling out the money, investors should check these expenses and make an informed decision.
- Know the terminology.
For a beginner investor, this is one of the most important aspects of investment preparation. Still, it is usually ignored. A first-time investor need not be a finance expert, but one must know the basic financial and technical jargon used for documentation.
Last but not least, investors must read the offer document of the fund carefully. The offer document is the master script that gives all the details, conditions, particulars, fees, charges, past performance records of the fund, etc.