In our daily lives, whenever we decide to make a major purchase, for example, to buy an appliance, we do a detailed research, look at each component, and then select what we will buy. This knowledge of what to expect from the product ensures that we have a good experience with what we buy.
The same goes for Mutual Funds. Before you invest in them, you should be aware of a few things that will ensure you have a rewarding investment experience.
In this blog we tell you the 6 things you should know before investing in Mutual Funds.
- Different categories of mutual funds have different levels of risk
The first and important point is that the risk of each category of mutual funds is different. No particular mutual fund category can be said to be high or low risk based on a common scale or common parameter. Sure, if you invest in direct stocks, then by comparison, stock mutual funds are low risk. But the risk associated with each category of mutual funds is different.
So before you invest in any mutual fund, check the risk meter of that particular mutual fund. Each scheme has a risk assigned to it, and you can see what risks you will take.
- Direct plans give higher returns
The second important point is that the expense ratio of direct plans is lower than that of regular plans. Because of this, direct plans generate better returns compared to Regular plans.
Now some investors are under the impression that direct plans and regular mutual fund scheme plans are different. That is not true. These are just plans for the same scheme. The only difference is that there is no agent or broker involved in direct plans, so there is no commission or brokerage. This means lower fund house costs and ultimately a lower annual cost to pay for your investments.
- You will not get the same returns every year
Typically, when you hear about mutual fund returns, they're annualized returns. This can give the impression that you will get the same returns every year.
Suppose the annualized return for a certain mutual fund plan is 8%. That doesn't webpage mean you'll earn 8% every year. That's because mutual fund financial statements returns aren't linear. For example, a mutual fund scheme may give you a +10% return in the first year, while it may only give you -2% in the second year. There may also be periods without return. Therefore, you should be prepared to see this variability in your annual returns.
- Consistency of returns is a hallmark of good funds
A particular MF capital gains statement scheme that delivers a consistent 10% return is better than a mutual fund scheme that has delivered +17% returns in the first year and -10% returns in the second year.
Now, why is this consistency in performance important? So that losses can be controlled and you have a higher chance of getting good returns. For example, a 5% drop in a year means the fund has to generate around 11% return to cover the loss and give you a 5% return. For this reason, a consistent fund will generate better returns on an annualized basis over the long term.
Therefore, always choose a consistent background.
- SIPs help create investment discipline
Automated investing via SIP not only helps teach discipline; they also help you profit from market volatility. That's because when the market goes down, you get more units for the same price. This helps you reduce your total investment cost. This is called rupee cost averaging, which can help you generate good returns in the long run.
- Asset allocation and periodic rebalancing are crucial
Never keep your eggs in a basket is an adage. And this is also relevant when it comes to investing. Asset allocation is the process of dividing your investments into asset classes to reduce your portfolio risk. So before you start investing, decide how much you will invest in different asset classes like stocks, gold, debt, etc., and then invest.
And while asset allocation is crucial, it won't be as beneficial as it can be with rebalancing. Rebalancing means that every time you increase an asset class and increase its percentage in your portfolio, you record the gains and reinvest that money in other asset classes that are part of your portfolio.
About Us
CAMS is a technology driven financial infrastructure and services provider to Mutual Funds and other financial institutions for over two decades. As the market leading Registrar and Transfer Agency to the Indian Mutual Fund industry, CAMS serves ~70% of the average assets under management – as of August 2021. We also provide technology enabled service solutions to Alternative Investment Funds and Insurance Companies. Besides serving as a B2B service partner, CAMS also serves customers through a variety of touch points such as pan-India network of service centres, white label call centre, online, mobile app and chatbot.
Website - https://www.camsonline.com/