Are you new to the world of investing? Whether you are a new or an old investor, you must have surely stumbled across the investment term – mutual fund investments. Mutual funds are indeed one of the most sought-after investment options among several retail investors. This article focusses on providing certain tips to investors (new or old) to help them invest in mutual funds:
Tips to invest in mutual funds
Here are several tips that can help you in your journey of investing in mutual funds:
- Understand the different types of mutual funds
As an investor, you can choose among different types of mutual funds. Mutual funds are bifurcated broadly on basis of their structure, investment goals and asset classes.
- Types of mutual funds according to structure – open-ended mutual funds, close-ended mutual funds, interval funds
- Types of mutual funds according to investment goals – growth funds, liquidity-based funds, fixed-maturity funds (FMF), capital preservation funds, tax-saving mutual funds (ELSS), pension funds
- Types of mutual funds according to asset classes – debt funds, equity mutual funds, and hybrid or balanced funds, solution-oriented funds, other funds
- Understand the benefits of mutual funds
When you invest in mutual funds, you enjoy all the benefits of mutual funds. Some of them are professional management by fund manager, diversified portfolio, power of compounding, potential to earn significant returns, high liquidity, and tax benefits. - Evaluate your risk profile
Risk profile refers to the ability of an individual to take risks in a hope to earn higher returns in the stock market. Usually, in mutual funds investment plans, a higher degree of risk is often rewarded with higher returns. Mutual funds are divided into 3 types based on the level of risk it possesses – high-risk mutual funds, moderate-risk mutual funds, and low-risk mutual funds. - Adopt the right asset allocation strategy
An asset allocation strategy can significantly impact the portfolio by minimizing the level or risks borne by the portfolio and maximizing the overall returns earned on the investment portfolio. - Choose the right type of funds for your portfolio
To ensure choosing mutual funds that have huge potential to generate significant returns, consider the following parameters before making your investment decision:
- Associated risks
- Expense ratio
- Quality of the fund manager
- Performance record
- Quality of the fund manager
- Asset management company (AMC)
- Asset under management (AUM)
- Tax on mutual funds
It’s important for an investor to understand the taxation on mutual funds to derive the true value of returns on their mutual fund investments. Mutual funds in India are subjected to two types of taxes:
- Tax on dividends
- Tax on capital gains
Depending on the type of mutual fund and their holding period, different rules are applicable for taxation on mutual funds.
Your decision to invest in mutual funds should be based on your needs. The mutual funds that you decide to invest in must align with your financial objectives, risk appetite, and investment horizon. You can also take the help of a mutual fund advisor or financial expert who can help you in choosing the right type of investments for your investment portfolio. Happy investing!