Top 5 Factors To Check Before Choosing A Mutual Fund
Mutual funds investment for long-term is considered one of the best ways to accumulate wealth at a rate that can beat growth in inflation. However, there are some important factors that an investor must look at while choosing a mutual fund plan. So this article delight list out Top 5 Factors To Check Before Choosing A Mutual Fund that an investor should look at while selecting a plan for one’s mutual funds portfolio.
Top 5 Factors To Check Before Choosing A Mutual Fund
Expense Ratio | Top 5 Parameters To Check Before Choosing A Mutual Fund
A mutual fund investor must know that fund houses charge an investor for managing its portfolio and this charge is called expense ratio. It is basically the fund manager’s fee that is levied upon all investors for ensuring profits across the investments. As an investor, you must target mutual funds that have a lower expense ratio. This is because, the percentage may seem quite small but when calculated across your total investment portfolio, it will have a larger impact. It’s often said that the higher the AUM, the lower the expense ratio.
Entry And Exit Load
Entry load refers to the fee that fund houses charge from investors while entering a scheme. Exit load refers to the fee charged at the time of exiting a mutual fund scheme. This is chargeable mostly if investors exit within a short period. This is to discourage quick exit and immediate outflow of cash from fund houses. The entry load has however been removed by most fund houses. As an investor, you must look out for mutual fund schemes that have zero or minimal entry and exit load.
Check Asset Under Management
AUM helps to build the market value of the firm. This increases the credibility of the Investment firm or or portfolio manager, which will eventually help to get more clients and more capital. Assets under management (AUM) should not be confused with its net asset value (NAV). NAV is calculated as the value of an investment fund’s total assets minus its total liabilities divided by the number of units. This can be used to calculate how much a particular share of an investment fund is worth AUM is a two-fold indicator, since it talks about performance and the size of a mutual fund. A higher or increasing AUM indicates positive mutual fund performance. A decreasing AUM, on the other hand, is an indication of poor performance or a high level of unit redemption by customers.
Do a Risk Analysis
This not only applies to the risk appetite of the investor but also understanding the risks that come with each mutual fund and whether it aligns with their risk tolerance. For example, equity mutual funds come with a higher degree of risk and the portfolio may see some ups and downs in the short term. But the returns from equity mutual funds are often higher than that of other funds, making them suitable for investors who are willing to go with the “high risk high-reward approach”. On the other hand, debt mutual funds come with lesser risk and are more stable. But the returns are lower than equity mutual funds and are often ideal for conservative investors and beginners.
Type of Plans : Regular or Direct
Direct and regular Mutual Funds are different versions of the same plan. In the case of direct, investors can directly buy required NAV units from a concerned fund house. In the case of regular, the units have to be purchased through a commissioner or broker. A key difference between the two is that returns are slightly higher in a direct Mutual Fund as no commission expenses are incurred. This commission varies between 1-1.25%, depending upon the asset management company and brokerage firm.
Final Takeaway | Top 5 Factors To Check Before Choosing A Mutual Fund
Choosing the right mutual fund looks easy, but it cannot be done without sticking to some basic criteria. With over 40 AMCs, over 1000 funds and more than 2000 schemes on offer, you are truly spoilt for choice. Following the above Top 5 Factors To Check Before Choosing A Mutual Fund helps identify the mutual funds for your specific needs. Each investor is unique in their investment decisions. It is essential to align one’s financial position, decisions, financial objectives, and risk appetite with the mutual fund plan that they choose to invest.
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