Category: Investment Management

10 points you must know while investing in Mutual Funds

10 points you must know while investing in Mutual Funds 

First-time mutual fund investors should understand the basic concept of mutual funds. For, everyone wants to pool in one’s money in certain mutual fund schemes with a view to earn high returns, but before doing so, there are many things you should be careful about.

Here are 10 things to know about making an investment in mutual funds:

Know about the MF scheme

Understand the mutual fund scheme in which you want to invest your money. Know all the tax implications of short and long-term gains, as per the tenure of various schemes, while making redemption of your money. Also know whether the schemes are providing you any tax benefit or not. Know the basics from your advisor or visit a website to know the ratings of the schemes on basis of returns and risk factors. Do not ever judge any scheme by its past performance.

Understand your risk appetite

MF schemes are designed for every type of investors. So, you should ask a few questions from yourself like – Is the scheme selected is suitable for you or not? Consider various facts which may affect your risk-taking capacity in the future before making any investment in equity, debt or hybrid funds.

Read the offer document

Whether you are investing directly or through a relationship manager, before investing into any scheme make sure that you have read the offer document carefully. All the information is given in the Key Information Scheme document (KIS). If you want further details of the fund manager, then you must refer to the statements of additional information provided for each particular scheme on the AMFI website.

Select scheme options

One of the most important things to understand while going through a direct or regular plan is the scheme option you are selecting. People who want to get only capital appreciation after a certain period of time should go for the growth option, while those who want to get dividend payouts at certain intervals should opt for the dividend option. You can also reinvest your dividend payouts.

Get your KYC done

This process helps in maintaining the identity and address proof of investors by the advisers and the mutual fund companies. The process of being a KYC compliant investor is done during the time you are filing your mutual fund documents. Make sure you have gone through the same process. However, the e-KYC done through UIDAI is also a valid process for being KYC-compliant.

Read your fund factsheet

Most importantly, read fund factsheet which is provided to you by AMCs at regular intervals. Understand the forthcoming deviations and market volatility structure mentioned in the sheet. This will help you in getting acknowledged with the returns you may likely to get in the future from your investment made in that particular fund.

Link investments to a financial goal

Right from the beginning, make it a habit that while making any investment through mutual funds, you will link your investments to a particular financial goal and thus, plan to choose your fund schemes accordingly. This helps you to time frame the redemption of the appreciated capital you have achieved over a particular period, which is nothing but your financial goal’s time period. This also helps you to know how much amount you need after that period of time.

 

Review your funds

Once you have invested your money in a scheme, do not forget to review the scheme half-yearly or yearly as per the time horizon of your financial goal. This is an important process which helps in sustaining your investment returns over that prolonged time-frame. To achieve a healthy return on your portfolio, you should take proper guidance of an investment adviser who will guide you in doing proper asset allocation, if required, from time to time.

It always important to remember that investing is a serious business; and thus it is vital that you adopt enough prudence before you invest your hard-earned money. Moreover, a disciplined approach to investing can help you to create wealth in the long run.

Quantitative Analysis for Mutual Fund Selection

Quantitative mutual fund analysis involves looking at different aspects of mutual fund performance and characteristics to determine which funds may be the best fit for you. This type of analysis generally looks at hard numbers, such as average returns, or the types of fees that a fund charges. In addition, quantitative analysis reviews the types of investments inside of mutual funds and how the assets of the fund are split up among investment types.

 

Fees and Expenses

Fees and expenses have a significant impact on the overall performance of a mutual fund and in determining how much return on investment your mutual fund should earn. Fees and expenses can also be compared when looking at different funds to get an idea which will expend the least of your investment capital or returns for management costs. Fees and expenses can have a significant effect on the long-term performance of mutual funds.

 

Historical Returns

Since nobody can accurately predict how a mutual fund will perform in the future, investment analysts performing quantitative analysis of a mutual fund will often look at the historical returns of a specific mutual fund. Historical returns will be provided on a one-year, three-year, five-year, 10-year and 15-year basis, though some go even further back, reporting on the mutual fund’s return since its creation. Better returns over longer periods are better signs of top-performing funds than short-term spikes in earnings.

 

Asset Allocation

Mutual funds invest their money differently depending on the investment goals of the fund, and they adjust these investments by choosing different types of asset allocations. These allocations also depend on the mutual fund and its management and investment philosophies. Asset allocation is often divided along the lines of a company’s size, meaning the stocks held in small, medium and large companies. Allocation is also divided by the type of stock, with value, blend and growth stocks. Growth stocks tend to be the most aggressive and may gain and lose money rapidly over the short term. However, growth stocks have the greatest potential for long-term gains and are a good pick if you can put up with the short-term volatility.

 

Qualitative analysis for the mutual funds

Investment Team:

The future returns of the fund are largely dependent on the investment decisions that a fund manager makes, thus an experienced fund manager is one of the most important criteria for any fund.

 

Investment strategy and Process :

Answers the question of where and how is the fund going to manage its investors money. It is a critical part of the selection process as it states which fund have been able to implement a successful strategy and generate an Active return out of it.

Investment Mandate:

It is a set a of instructions for the fund manager to make investments. Any unique provision in the mandate that enables the fund manager to generate more returns are preferred.

Transparency : of the funds house

Keep in mind these five points about mutual fund costs before you invest in a fund

 

Fund returns are net of all costs

When comparing mutual funds with other investments like ULIPs, note that the NAV-based returns of mutual funds are net of all expenses. In fact, the expense ratio is the only item of cost allowed to be (apart from the optional exit load) charged by the fund. What you see in the MF NAV is thus what you will get, both at the time of purchase and redemption. Now, ULIPs charge fund management fees to the NAV just like MFs, but they also levy a battery of other costs such as mortality charges for the insurance cover, premium allocation charges, which do not reflect in the NAV but are usually deducted from your investment before you are allotted units. When you redeem, ULIPs also levy surrender charges on top of the NAV. So if you’re comparing a MF with an ULIP, don’t just go by NAV returns alone.

 

Expense ratio is a moving target

You may decide to buy a fund based on the expense ratio in its latest factsheet. But while doing so, be aware that the ratio is not cast in stone. The fund is free to peg its expense ratio sharply up or down over time. On the debt side, schemes have even been known to kick off with a very reasonable looking expense ratio, only to hike it the very next year. Nor do fund houses have to take your permission to change their expense structure, as it isn’t a ‘fundamental attribute’ of the scheme. All this means that you don’t just have to keep an eye on fund costs when you invest. You also need to check back on costs every time you review your portfolio.

 

Smart beta ETFs are here

Active funds in India are expensive when compared to their Western peers, but ETFs aren’t. While active large-cap funds sported an average expense ratio of 2.33 per cent in June 2016, index funds and ETFs averaged only 0.55 per cent for the same period. Yes, there are 1 per cent plus funds (open end index funds) in the category, but you also have ETFs from HDFC, Invesco, Reliance R*Shares and Edelweiss charging a modest 0.05 to 0.10 per cent a year to passively track indices. With the bourses rolling out ‘Smart’ indices (playing on Quality, Value, Dividend Opportunities and so on) that use quantitative filters to select stocks, fund houses have also begun to launch ETFs that mimic these indices. These offer a low-cost yet smarter alternative to plain Jane Nifty and Sensex tracking ETFs.

 

Anoop

Dilzer Consultants Pvt Ltd

https://www.moneycontrol.com/news/business/personal-finance/5-things-young-investors-should-know-before-investing-in-mutual-funds-2342741.html

https://www.firstpost.com/investing/what-you-need-to-know-before-investing-in-mutual-funds-3293972.html

abcd