To invest in mutual funds involves a considerable degree of planning and research. Before making a foray into this domain considers the following pointers.
Understand the levels of risk tolerance
Before you go on to choose mutual funds you need to have an idea about the risk you can tolerate. This is a measure of the amount of market risk you can handle. Returns and risks are both sides of the same coin, and the moment risk becomes lower so too the return. If the risk appetite is lower it is much better to opt for debt mutual funds. These are considered to be the safest among all mutual fund options.
In the mutual fund category learn to choose the best mutual fund
With thousands of mutual funds on offer, an investor can suffer from information overload and end up making needless mistakes. Once you are clear about asset allocation, it is necessary to choose the best mutual funds and even align it with your investment goals. In order to match your investment patterns with mutual funds there are some parameters to consider
Evaluate the past performance
Past performance is not an indicator of future performance. People start off with this step but they stop here as well. In evaluation of funds they consider only the returns. The fund performance along with the performance of fund managers also seems to be really important. It would make sense if you look into the fund ever since its inception to formulate an idea.
Age of the fund
It makes sense to invest in a mutual fund which is more than 5 years old as they have a reasonable reputation in the market. In addition if the funds have been in existence for a long time it becomes easy to track down their performance.
In the choice of a mutual fund clearly outline the risk appetite. Mutual funds income tax exemption is the main reasons why people choose funds, but clearly have an idea about the maximum risk capacity.
Various agencies are there in the market which has their own methodology of analysing mutual funds. Though the ratings may vary from agency to agency it provides a precise indicator on the type of mutual fund you can choose. This difference may not exist for all type of mutual funds as some of them can be at a similar level.
Do conduct your own research and do not rely on what websites have to showcase.
Monitor your fund on a regular basis
The critical areas which most investors tends to ignore would be performance of mutual funds and how it aligns with their investment objectives. Via periodic monitoring it is easy to determine whether your investment objectives are on track.
If such a lot of hard work is done, you are almost there. Just keep a track of your investment and adopt the strategy of rebalancing. This is a process of making changes to your existing portfolio of investments.