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Chapter 3.3: How to Invest in Mutual Funds
The lure of the stock market has always been the large returns on investmentthat it promises in good times. However, there’s always a flipside of huge losses during bear runs that make the stock market slightly shaky territory for small investors. This is where mutual funds step into the picture.
Mutual funds pool the resources of a number of small investors and invest these combined resources in the stock market under the guidance of a team of qualified stock brokers and research analysts.
How to Invest In a Mutual Fund :
Now that we know what mutual funds are and how they are structured, we are in a better position to understand how to invest our money in those funds that will give us the best bang for our buck.
Decide Your Investment Objectives
Before you set out to invest money in various investment vehicles, it is important to take a step back and understand exactly why you are saving up. Is it for a short term need? Do you have a long term investment horizon in mind? Would you prefer investments that give you returns on a recurring basis?
Your age and stage of life will also play an important role in deciding your investment objectives. Decide what you want your money to do for you and then proceed.
Shortlist Funds That Match Your Objectives
The team that manages a mutual fund picks the stocks which investors’ money will be put into based on clearly defined investment objectives. There are many kinds of mutual funds based on these investment objectives – rapid growth, retirement benefits, regular returns and so on.
The four fundamental objectives that guide most funds are:
- Fixed Income
- Balance of growth and income
- Quick Turnover of Funds
We will go through the various types of mutual funds in detail in the coming chapters. To know more, click here.
The investment vehicles into which funds are channeled are decided on the basis of these investment objectives. Typically, equities are favored by growth-oriented funds and stability or income-oriented funds go for debt instruments, government securities and the like. These play an important role while taking your mutual fund decision.
Once you know what you need from a mutual fund – growth, fixed returns, quick turnaround or a balanced approach – you can zero in on that category of funds that meets these objectives. From the category of mutual funds that matches your needs, shortlist funds based on not just their current performance, but also their performance over longer periods like 6 months, 1 year, 3 year and 5 year returns.
Analyze & Compare Shortlisted Funds
Look for the prospectus or quarterly reports of the shortlisted funds and analyze their performance. The prospectus also gives detailed insights on what does the fund hope to achieve, what sectors it invests in, what type of returns is has been giving investors over the years, comparisons of its returns against index performance and so on.
Study this data and check for consistency in the funds’ performance over your investment horizon. Also compare their performance against that of other funds with similar objectives and benchmark indices. Another important factor to look for is the asset base of each fund under consideration. Go for established funds with a proven track record
Shortlist Funds That Match Your Objectives
Investing in a mutual fund is not like putting money in a bank account. There are certain fees that are attached to the investment you make that will be deducted by the AMC. These fees can sometimes add up to be quite significant and eat away into whatever returns you might make on your investments.
These fees include entry load, exit load, annual expenses, management fees and so on. While annual expenses and management fees should ideally be in the region of 0.6% and 1% respectively, entry and exit loads can vary between individual funds. Study the costs involved with each fund and arrive at your final picks.
Don’t Pick Just One
Once you are done with your analysis, don’t jump onto the best fund as per your reckoning and park all your money with just one fund. In spite of every possible analysis and calculation, the stock market has a way of throwing predictions out of the window.
Spread your risks by splitting your investment and putting in smaller sums in two or three different funds that figured on the top of your list after all the filtering and analysis.
Change Tracks Whenever Necessary
Unlike fixed income instruments like bank FDs, mutual fund investments are subjected to the same market forces that affect equities, derivatives, and other forms of securities. However, the level of scrutiny need not be as close as you would have for individual stock purchases for the simple reason that a mutual fund is a professionally managed investment. Qualified stock market analysts and fund managers who track every small move in the markets manage your funds as a full-time job.
Having said that, you can’t simply wash your hands off your mutual fund investments once you buy them either. With fund performances moving in tandem with the stock market’s movements, it becomes imperative that you keep an eye on what is happening to your investment on at least a quarterly basis.
Knowing how to invest is very important. Now that you have learnt the key factors to keep in mind while taking investment decisions, let’s move ahead about understand the actual buying and selling process. Click here to know more.
Why Capital gains report?
- Snapshot of profit/loss
- Reflects performance of your portfolio
- Helps compute taxes
Read about four principle factors affecting stock prices