Five Important Things to Consider Before Investing in Mutual Fund

Gone are those days when we have limited information, a little investment knowledge, and limited options to invest. Hence most of us limit ourselves to fixed deposits, gold, or real estate to watch our money to amplify. The golden nugget secrets were limited to financial gurus, and only very few people were aware of different ways to create their wealth from their savings.

Now the scenario is different; people are bombarded with enormous information through various media. Although we are on the upper hand to know about various financial instruments, our minds are still baffled.

Where the ad campaigns entice us to invest in mutual funds followed by a break free voice at the end,” mutual funds are subject to market risk.”

The word” risk ” bangs on our mind like a boomerang, which makes our subconscious mind alert and thoughts keep on juggling, whether to go for it or not.

Well, before pushing your hard earnings into the new Field, what I genuinely feel is all of us should know first, what is a mutual fund, and how it works.

Let me explain it in a simple language.

When several Individuals pool money coming for a common purpose, it is called a mutual fund whose goal is to benefit from the capital market.

Although these individuals have money, they do not have proper knowledge of where to invest that lump sum money. So, an asset management company does that for them. They diversify these funds in various sectors so that it will have less risk.

Now the question arises.

Is this risk appearing due to the market change?

And the answer is yes, but the risk is lesser because the funds are diversified and done by a professional.

How These Things are Done?

Once you have given money for the investment, you will be allotted units that can be easily redeemable to get back your money.

Everything starts with a term called NAV that is the Net Asset Value of a stock, which indicates one unit of your investment after deducting one asset management expense.  It is significant to consider here that the management expense is significantly less. It varies from 0.5% to 1%

To calculate the Market value of your investment, you need to multiply NAV into the number of units you hold.

So, what factors we need to assess before jumping into this puddle?

1.Set a goal: Before investing, your purpose should be clear. You should know why you want to invest this money: a few examples it could be buying a house, purchasing a car, or your children’s education.

2.Preference of Investment: There is various investment option available in the market. Let’s say if you are a businessman or a salary holder who got a bonus. You can then invest in lumpsum amount like a fixed deposit, and If you are a salary holder and want to invest monthly like recurring deposits. Then you need to invest in a SIP (Systematic investment plan.)

3.Do a risk profile for yourself: The word Risk profile may sound very technical, but it means you must determine how much risk you are willing to take. Risk is directly proportional to return, but at the same time, the chances of losing the money are high. So, decide how much return you want and how much risk you can afford. If you wish to higher return, then invest in an equity-linked mutual fund, and if you’re going to a lesser return, you can choose a debt mutual fund.

4.A decision on various investing options: Decide which category you would like to invest based on your risk appetite. There are multiple categories like small-cap, mid-cap, large-cap, mutual fund related to real estate, etc.

5.Analyse last five years funds’ performance: You will find so many mutual funds in each category. Do some research on each fund’s performance over the previous five years. Then figure out which fund is meeting your requirement.

Investing in a mutual fund may sound a hefty task. But if you will consider the above points, you will reach to the right fund manager who will manage your investment and help you to achieve your financial goal.

Suchismita Pradhan

I am an accountant by profession, co-author of the novel,Aggregate50 and a creative writer who draws inspiration from daily life and tries to look at a situation from different perspectives

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