Summary: Choosing the right mutual fund involves evaluating several key factors to align with your financial goals. Start by identifying your investment objectives—whether short-term or long-term, such as retirement planning or buying a house. Assess your risk tolerance, as mutual funds come in varying risk levels: equity funds (high risk), debt funds (low risk), and hybrid funds (medium risk). Consider the investment duration; longer horizons often yield better returns due to compounding. Decide on your preferred investment method—Systematic Investment Plans (SIPs) allow regular contributions, while lump-sum investments provide flexibility. Evaluate the fund’s liquidity; some funds may have lock-in periods or charges for early withdrawal. Analyzing the fund’s past performance, such as returns over 12 months and its history through market fluctuations, can offer insights into stability and potential. Additional considerations include the fund manager’s track record, entry and exit charges, Asset Under Management (AUM), and metrics like Compound Annual Growth Rate (CAGR). Careful examination of these parameters ensures your chosen mutual fund aligns with your financial strategy and liquidity needs.
We often hear about mutual funds and SIP. Everyone wants to invest in mutual funds but before investing we have to check mutual funds on various parameters so check we can achieve our desired goal.
How to choose best mutual fund?
1. Identify your goals – A goal can be short or long term. Before investing in any mutual fund, identify the purpose of investing. Whether it is for retirement purpose or to buy a house or a car or to have a fixed income in the future. Your goal decides the type of mutual funds.
2. Risk Intaker/tolerance – It means how much risk you can take. Every one who is investing in mutual fund have to analyze the risk involved in investing and as whether it can take so much risk or not. Different mutual funds have different types of risk.
Equity mutual fund invest in equity shares and equity related instruments which are subject to market fluctuations and involves high risk.
Debt mutual fund invest only in debt or fixed income instruments. These are low risk mutual funds.
Hybrid mutual funds invest both in equity and debt and as such they are suitable for those investors who wants medium risk.
3. Time duration – Before investing in mutual fund you have to think as for how long you want to invest in mutual funds. If you invest for long duration you will get more returns as compounding works.
4. Monthly investment – The amount which you want to invest in mutual funds. You have the option to invest a fixed sum on monthly/quarterly/yearly basis called SIP or invest a lump sum in starting only. You can also have step up SIP option in which a fixed percentage will be increases in every monthly SIP.
5. Liquidity – As many people do not invest in mutual funds because of liquidity. Liquidity means to sell them whenever required and have money. As some mutual have lock in period and some have charges if sold within stipulated time period so before investing check as can they sell as and when required and also charges on selling them.
6. Funds performance – We have to check mutual funds past performance. As in which securities it has invested money, how it performed in last 12 months. Along with also check how old is that mutual fund. As if mutual fund is very then it has seen all ups and downs of the market and is well versed with the market.
Apart from above parameters we also have to check who is fund manager, history of fund manager, exit load and entry charges, AUM of the fund, CAGR of last years. Capital appreciation.
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