How Do I Know Which Fund is Right for Me?
Many of us want to invest in mutual funds. You simply need a mutual fund like fixed income funds, equity funds, or balanced funds that suits your best interest, and now its time to determine what types of mutual funds will suit you. Given you have a fair understanding of your objectives and also an understanding of the level of risk you can take it will be easy to find the type of fund that is suitable for you.
Step 1: Discuss Your Investment Objectives and Risk Profile
Before choosing the most appropriate fund you need to talk about your investment goals and risk tolerance before hand. You must be well aware of your investment objectives and goals. To do that, the very first step to be taken would be to discuss it with a financial expert or advisor. They will make you explain the following:
- Your Investment Objective: Is the money for saving towards a retirement or emergency or is it for something more short-lived?
- Time Horizon: What time horizon is best for you? Is this investment being done for a long-term, mid-term, or short-term period?
- Risk Appetite: How much amount of risk are you willing to accept on your investment? Are you looking for a return that is somewhat volatile? Or do you want less return than you could earn as long as it is more stable?
The following factors will help you find the right mutual funds to suit your needs.
Step 2: Choose the Type of Fund
When it comes to choosing the right type of fund, and you have described the goals you have and the risk you are willing to accept, you can really start deciding the right type of fund that will meet those needs. There are many choices, and these funds fit into distinct categories:
- Equity Funds: You may consider an equity fund as an option to invest in, in case you need to invest in a fund over a period of 5 years and longer with the possibility of high returns over the long term and are able to take some risk in between. Equity funds are risky and volatile investments in shares, however in the long term, equity funds will mostly be rewarding in the long term.
- Balanced funds: These funds are invested in a combination of stocks and bonds in an endeavor to balance risk and returns. This is good to people who desire a little growth and a little stability, and can accept a little market risk.
- Fixed Income Funds: This may be the most appropriate one in the event that you dislike a lot of risk and prefer to have possibly stable returns. They primarily invest in bonds and debt with lower returns than stock funds. The risk level is minimal.
- Liquid Funds: Liquid funds are good up to a certain time, practitioners may also select temporary investments of a few months. They put their money on something highly liquid and relatively low risk bonds like government securities and treasury bills and are usually a safe haven in case you need easy access to cash.
- Monthly Income Plans (MIPs) and Income Plans: They might suit the needs of those who are seeking some regular income. They attempt to generate steady revenues using an appropriate proportion of debt and equities.
Step 3: Choosing the Right Asset Management Company (AMC)
Once you are aware of the type of fund you wish to invest in, choose the Asset Management Company (AMC) to invest in it. While doing so consider these points:
- Track Record: Just consider the performance record of the AMC and its reputation. More experienced AMCs tend to possess superior knowledge of the market.
- Suitability of the Scheme: Make sure that the AMC funds suit your risk level, duration of investment and investment goals.
- Experience of Fund Manager: Look into the experience of the fund manager. A skilled manager can actually impact your returns.
- Fees and Expenses: Compare costs and fees among various AMCs. Expensive fees may devour your returns in the long run.
Step 4: Review the Scheme Factsheets and Key Documents
You should know the specific fund you are investing in. You need to verify the factsheets and key documents. Two noteworthy articles to refer to are:
- Scheme Factsheet: This provides a quick overview of what the fund wants to achieve, what it has on the funds, and the performance of the funds. It assists you in comparing funds fast.
- Key Information Memorandum (KIM): This explains the investment plan of the fund, the risks of investing in the fund, and the kind of assets that the fund will invest in. The KIM is terrific to be more specific.
To get even more information, you can consult the Scheme Information Document (SID). This report penetrates into the strategy and management of the fund.
Step 5: Make Your Investment Decision
It is time to make a choice after examining all the papers and consulting an advisor. After choosing the good fund, you are able to invest directly via the fund companies web site or via a distributor.
Varun Hiremath is the Founder and CEO of FairDeal Wealth Advisors and has more than 12 years of experience in finance. He joins his knowledge in wealth management with educating investors. His company assists individuals to learn complex money matters with ease and to make intelligent investment decisions such as mutual funds. Varun desires to have the clients really know their financial direction. He is making much effort to establish honest and reliable relations with Indian investors.
Conclusion
In conclusion, to locate the appropriate mutual fund you need to know what your financial goals are, what amount of risk you are willing to accept, and what is the duration of time you intend to maintain the shares that you have invested in. The three things that you should first focus on when you hear the words mutual funds are, consulting an advisor, reading the offering documents, and locating the right company.
