Choosing the Right Fund

In the previous chapter, we discussed the tax implications of investing and how knowing taxes like dividend and capital gains taxes can improve your planning. As they proceed with their investing journey, Ravi and Priya must make a crucial choice: selecting the best mutual fund.

Given the abundance of options, it's critical to comprehend your objectives, level of risk tolerance, and anticipated returns. In this chapter, we will understand these considerations so they can choose the mutual funds that best meet their requirements.

First, define your goals: Are you saving for retirement or something more immediate, like a vacation? If your goal is short-term, invest in a less volatile fund that carries less risk. You can afford to take on a bit more risk if your goals are long-term because you have time to ride out the market's ups and downs.

Equally important is your risk tolerance. Different funds carry different levels of risk. For instance, high-risk funds, like equity funds, are highly volatile and promise bigger returns. Equity funds might be your best bet if you can tolerate market fluctuations and stomach ups and downs. Conversely, if you're looking for stability and reduced risk, bond or hybrid funds—a combination of stocks and bonds—would be better suited.

Next, it's the fund's historical performance. It is a wide-angle view of how well the fund has been managed all these years but doesn't promise its future return. You will glance at a specific fund's performance over the past three, five, or ten years. You have a more long-term view from it as far as the continuity and steadiness of the performance go under varying market conditions.

Another important factor will be the fund manager. The erudite fund manager makes quite a difference in the fund's performance. Take time to study his experience and past successes. With a good previous track record, a manager should, by all means, keep your fund stable in times of market uncertainty. All information about this might also be found on the fund's website or inside the fact sheet of that investment.

Besides the cost of acquiring, another vital factor is fees. Every mutual fund has an expense ratio for paying off the operating expenses of the fund. Each year, this is deducted from an investor's investment. At first sight, a minute difference in fees may seem small to someone. However, it gets bigger with time. High fees can cut your long-term returns, so seek out reasonable costs, but only let that be one of the reasons you invest in a particular fund. Sometimes, high fees are worth it if the fund is performing well.

The fund's investment style is another crucial factor. The manager makes stock selections in actively managed funds to outperform the market. As with index funds, which replicate the performance of a market index, other funds adopt a passive strategy. Generally having lower fees, index funds may not outperform actively managed funds in certain market conditions. If you are okay with mediocre returns at lower costs, passive funds could help you reach your goals.

Diversification of your portfolio is also essential. You should not put all your money in one fund or sector. Spreading your investments across various funds and asset classes reduces the impact one fund may have on your overall portfolio. Diversification smooths out ups and downs, making your investment journey less bumpy.

Lastly, note the minimum investment amount: Minimum subscriptions for some funds can be between ₹ 5,000 and ₹ 10,000 or more. Before investing, first, make sure you are comfortable with how much you are contributing. Often, less upfront but regular investments and investing in smaller tranches have proved to be wiser rather than trying to time market entries. This way, you can gain from market fluctuations without risking large sums.

Conclusion:

As Ravi and Priya evaluate choosing the right mutual fund, they understand the importance of aligning their investment choices with their personal goals, risk tolerance, and the fund's track record. By focusing on these elements, they can make a more informed decision about their investments.

Now that we are on the right path to choosing funds that suit our objectives, we will explore how to create a well-balanced investment strategy through portfolio diversification in the next chapter, which is crucial for managing risk and optimising returns over time.