Mutual funds are a very popular type of investment. However, they can be somewhat complex. They are also offered in a multitude of variations. The sheer number of fund offerings in the market alone can make them a bit overwhelming for many investors.
Thus, there are a few key things that can be helpful to know about mutual funds before making any type of investment. Here are some of the key considerations to be aware of before adding these investments to your portfolio. There are over 7, mutual funds, each with a different goal and objective.
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Some invest in bonds, some in stocks, and some have a wide range of eligible investments. The strategies for these funds can vary widely, spanning from balanced, to conservative, aggressive, income-focused, and growth-oriented.
One of the advantages of a mutual fund is it allows you to capture the returns of an entire segment of the market without having to buy and sell individual stocks and bonds. This ability to diversify across many investments with the purchase of a single fund is one of the main reasons mutual funds are so popular. To pick a mutual fund that will be a good investment for you, you have to define your investing goals and objectives.
This will help you to narrow down your choices.
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For example, if you're not planning on using the invested funds for a long time, you can focus on long-term growth. If you pick a growth fund when you needed safety - or vice versa - then the fund is not likely to end up being a good investment for you. Fees are an important factor in investing and can be a deterrent for many investors.
Funds pass along these costs to investors by charging fees and expenses.
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Fees and expenses vary from fund to fund. A fund with high costs must perform better than a low-cost fund to generate the same returns for you. Even small differences in fees can mean large differences in returns over time. If you invested in a fund with the same performance and expenses of 0.
It takes only minutes to use a mutual fund cost calculator to compute how the costs of different mutual funds add up over time and eat into your returns. By law, each mutual fund is required to file a prospectus and regular shareholder reports with the SEC.
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Before you invest, be sure to read the prospectus and the required shareholder reports. Always check that the investment adviser is registered before investing. Mutual Funds. What are mutual funds? How to buy and sell mutual funds Understanding fees Avoiding fraud Additional information Why do people buy mutual funds?
Some Key Things to Know about Mutual Funds
Mutual funds are a popular choice among investors because they generally offer the following features: Professional Management. The fund managers do the research for you. They select the securities and monitor the performance. This helps to lower your risk if one company fails.
Step 1. Decide whether to go active or passive
Most mutual funds set a relatively low dollar amount for initial investment and subsequent purchases. Mutual fund investors can easily redeem their shares at any time, for the current net asset value NAV plus any redemption fees. Money market funds have relatively low risks. By law, they can invest only in certain high-quality, short-term investments issued by U. Bond funds have higher risks than money market funds because they typically aim to produce higher returns.
But this approach is not for everyone, as the markets tends to throw up surprises when you least expect them. This often leads to disasters. Suppose you plan to accumulate Rs 25 lakh over the next 10 years. If your fund keeps delivering the required return, you should not be bothered if some other fund is generating a slightly higher return. Investors should also avoid thematic investments or aggressive strategies.
Bala reckons they should not pick fancy products to earn more. A simple asset allocation and rebalancing strategy should suffice for most.
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For those not comfortable doing asset allocation on their own, dynamic asset allocation funds or balanced advantage funds can be an alternative. With their in-built rebalancing mechanism, these funds get people to buy at the bottom and book profits at the top and thus provide a better investment experience. Do flexible SIPs work? In recent years, investors have been pouring money into equity funds via SIPs. These inflows have been growing irrespective of market conditions. Even at record market highs, notwithstanding expensive valuations, people have been investing.
While regular investing for the long term is a virtue, is there a better way to invest than putting investments on auto-pilot? Some experts suggest that people who invest through SIPs may not necessarily benefit by committing to a fixed investment amount indefinitely.
Today, mutual funds and investment platforms offer tools that enable timing the market. They help people determine when to begin their SIP, to continue or stop an existing SIP, and to skip investing or double the investment in a particular month. The argument is that by investing more or less at certain points in time, the investor can optimise the SIP and get the most out of market fluctuations. However, some experts suggest investors not to tweak or play around with the simplicity of the SIP.
Such investors should stick with the traditional SIP. Investors may instead opt to supplement their SIP. So, had you initiated a flexi SIP 10 years ago with basic monthly investment of Rs 3, and raised it to Rs 6, whenever the index PE fell below 18, it would not have made a huge difference to your returns. Is passive investing better? There are some who argue that people would do fine, if they just invest passively through an index fund. These funds charge much lower fee compared to actively managed funds. This helps them deliver returns in line with the market over time.
But many experts are not convinced that passive investing is an optimal option.
Top 5 Reasons for Retail Investors to Invest in Passive Funds
At present, a hybrid strategy is a must to beat the market. Besides, passive investing will not help you stay abreast of market return, if you resort to timing. Beware of mind tricks Finally, it is critical that investors realise the biases at play in their mind. These biases make us our own worst enemy by interfering with logical decision making.
For instance, herding is a common investor trait that attracts investors to act according to the popular sentiment.