how to choose a Mutual Fund
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How to Choose a Mutual Fund

How to Choose a Mutual Fund

An investor should first decide the financial goals if any and then proceed further. In case, investment is to be made for a short period, the best option will be a liquid fund. (Choose a Mutual Fund)

A liquid fund with a high ‘AUM’ and one which gives good service in terms of redemption on the phone or net should be selected.

In the case of a longer-term investment, equity mutual funds are the best. While selecting a mutual fund a close watch needs to be kept on the asset management charges and the portfolio turnover ratio. The rating of a particular fund is not that important.

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The Myth of a Perfect Mutual Fund

Many new investors are on the lookout for a perfect mutual fund, one that offers maximum return with minimum risk.

But they will be disappointed to know that such a mutual fund does not exist. Every mutual fund is on a risk-return continuum. The ones that offer higher returns are by definition riskier.

Choose Funds Which Suit Your Risk Appetite

Every investor must know their risk appetites before investing in mutual funds.

The amount of risk you can take with excess cash is different from the one you can take with your retirement money.

Also as a young individual, you can afford to take more risk with your retirement money than someone who is at the end of his/her career. Ensure that you match the risk with the returns you expect.

Keep an Eye on the Costs

Lastly, choose the funds with the least costs. It is well-known fact that firms that charge a lot of fees are not well managed. Good funds will ask for a profit share rather than upfront money.

How mutual funds work and trade in the market?

There are two basic types of mutual funds open-ended and closed-end. The important points of parity and difference between these two are as follows:

Collect Money

Open-ended funds collect money from investors on an ongoing basis. This means that whenever a new investor is willing to invest in a fund, an open-ended fund will create new units and give them to the investor in return for cash.

Hence you are dealing with the funds and the numbers of units that can be created are virtually unlimited.

On the other hand, a closed-end fund collects funds from investors only at the beginning and pays back the money only at the end of the fund

Mutual Funds v/s Bonds

It is not only important to understand each asset class in itself, it is equally important to understand the difference between different asset classes.

To make an informed choice, an investor is expected to know the relative pros and cons of the investments.

One should understand how mutual funds and bonds stand against each another

They Are Not Mutually Exclusive

Firstly they are not mutually exclusive. This means that you could be investing in mutual funds and the money could be going into bonds.

Hence there is some degree of overlap. Every mutual fund has some amount of money that is kept aside for investing in bonds. This adds stability to the overall portfolio.

Mutual Funds Give More Diversification

If you invest in mutual funds, your money can be more diversified.

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