5 point checklist before investing in mutual fund schemes

New starts are great because they allow you to revise your existing plans. This holds for investments in mutual funds as well. Mutual funds are some of the most common investment options that can be chosen by novice investors, more experienced investors, and those with a wide range of experience in investing.

Here is a 5-point checklist before investing in mutual fund schemes to ensure that you meet your financial objectives within the time horizon you have set as per your risk tolerance:

  • Research is key

Return expectation, investment knowledge, risk tolerance, investment horizon, and other factors must be considered before you invest in mutual fund. The investment can also be judged based on past performance, assets under management (AUM), expense ratio, your fund manager’s experience, and other factors.

A crucial financial choice is making mutual fund investments under a structured investment plan, or an SIP. A specific sum will be taken out of your account at predetermined intervals and invested in the fund.

  • Do a thorough risk analysis

Investors frequently chase performance. In other words, they pay little attention to the risk involved and swarm to strategies that are among the best performers. Even while equities funds may have produced the best returns in recent years, it is prudent to be mindful of the risk.

For instance, stock mutual funds carry a higher level of risk, and the portfolio may experience short-term ups and downs. However, equity mutual funds frequently offer better returns than other funds, making it ideal for investors who already are open to taking a high risk, high reward approach.

  • Timing

Mutual funds offer a respectable gain over time, regardless of market changes. According to rupee cost averaging, a constant sum regularly invested, such as through a systematic investment plan (SIP), will buy more when the prices are low and vice versa.

You can, for instance, make a long-term investment in equity funds to attain your long-term financial objectives. You could invest in debt funds to achieve your short and long-term financial objectives.

However, if you want to achieve long-term financial objectives, like saving for retirement or purchasing a home, you may invest in equity funds.

  • Choose the right investment plan

An appropriate mutual fund category — debt mutual fund, hybrid mutual fund, or equity mutual fund —can be chosen based on the objective. Deciding on a category should be done basis your financial goals and risk tolerance. Likewise, it is essential to decide the manner in which you would want to make your investments – either via a lumpsum amount or via an SIP. You can avoid trying to time the stock market if you invest in a mutual fund through an SIP.

  • Diversify your funds

Depending on your risk tolerance, age, time horizon, and investing goals, you might diversify your portfolio of mutual funds. You may diversify your portfolio by investing more in equities if you are a young investor. As you get closer to retirement, you could switch your exposure from equities to debt mutual funds.

Investors, especially newcomers, must take tax considerations into account. The holding period and appropriate tax rate determine how much tax is due on the returns from equity mutual funds. Mutual funds frequently provide adequate post-tax returns.

To avoid portfolio duplication, boost diversity, and improve the risk-reward ratio, you may invest in equity funds that include different stocks.

In a nutshell, mutual fund schemes are an investment strategy that collects money from several participants into a single pool to produce an investment product. The fund manager can use this cash to invest in various securities, such as stocks, bonds, etc. Each mutual fund, though, will have a specific goal.

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