Six steps to start investing in Mutual Funds
The first step to making any investment is to set the goals of the investment. You have to decide how long you want to invest and the risk you’re willing to take. High risk investments are also the ones that provide high return, so it is similar to the scenario of all or none.
2. Pick a type of fund.
Dividend Funds - If the primary goal of the investment is to generate a source of income, dividend funds are an option for investment.
Growth Funds – If the primary goal of the investment is to grow the investment, equity funds are an option. Equity funds are relatively higher risk investments.
Debt Funds – If the goal is to have a more stable investment, debt funds are an option.
Tax Saving Funds - If the objective is to save taxes, ELSS (Equity Linked Savings Scheme) funds should be considered.
3. Shortlist mutual funds in your desired category.
Once you have set your investment goals and picked the type of mutual fund you want to invest in, the next step is to shortlist mutual funds in your desired category.
The following is an example of a mutual fund selector that you can use to get a list of mutual funds in your desired category.
4. Read offer documents of shortlisted funds.
An offer document contains information that an investor can use to assess the fund. The following are a few things to look for in an offer document:
Past performance data: Past performance data helps understand a fund’s past performance objectives and results. However, it is important to understand that there are no guarantees that a fund will continue to perform the same way it did in the past.
Fees: It is important to understand the fees and other costs associated with managing the fund. An investor will be charged management fees and other costs for investing in a mutual fund. This information will be specified as an expense ratio – an expense ratio of 2% indicates that the fund will charge Rs. 2 for every Rs. 100 that is invested.
Minimum investment requirements: This information can be used to determine the affordability of the fund.
Tax related information: Taxes are an important part of any investment. The tax benefits and liabilities have to be clearly understood before making an investment. ELSS funds have tax benefits. Capital gains or net profits that result from the sale of units in a mutual fund are taxable.
Fund manager profile: The fund manager is the person who will be ultimately making investment decisions with your money. Therefore it is very important to look at the fund manager profile. You certainly do not want a novice managing your money.
5. Review rankings of shortlisted funds.
Once you’ve identified the types of mutual funds your’re interested in and have shortlisted some mutual funds of that type, it is important to review offer documents and also look at standardized rankings for the shortlisted mutual funds.
The following companies provide rankings of mutual funds:
i) CRISIL – www.crisil.com
ii) MutualFundsIndia – www.mutualfundsindia.com
iii) MorningStar – www.morningstar.in
6. Make your first mutual fund investment.
Once you have reviewed the rankings and offer documents, you can make your final selection. Once you have selected the mutual fund you want to buy, you can buy though the AMC, banks or online.
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