5 Things to Keep in Mind Before Investing in Mutual Funds
Investing in mutual funds is a great way to grow your money. However, if you are new to investing, you may get confused or find it difficult to choose the right way of investing your money. This post lists our 5 points that you may consider before investing in mutual funds. Read on!
5 Things to Keep in Mind
Types of Fund
There are two types of funds: Passive and Active. Passive funds are those mutual funds that mimic the portfolio of benchmark indices like Nifty 50, Sensex, etc. For example Navi Nifty 50 Index Fund tracks the benchmark index Nifty 50. This means that with time, the return on Navi Nifty 50 Index Fund would be on par with the growth in the Nifty 50 index.
Active mutual funds are actively managed by the asset management company. This means that your money would be invested in different stocks by an asset manager. Your asset manager will decide which company’s stock to invest in and the amount to be invested in each stock.
Expense Ratio
The expense ratio is the fees levied by the asset management company annually. Depending on the type of fund, fund manager, and return prospects, the expense ratio is decided.
Active mutual funds generally cost more than passive mutual funds, because the fund manager has to handle more responsibility, risk, and decisions in case of active mutual funds.
Important Note: The expense ratio of the same mutual fund could differ depending on where you are buying it from. Always choose for ‘Direct plan’ mutual funds and say No to ‘Regular plan’ mutual funds.
Both are two subsets of the exact same mutual fund, the only difference is that direct plan funds do not have distributor margin in between thereby lowering the expense ratio. Otherwise, there is no difference between a mutual fund’s direct and regular plans.
Fund Manager
This is the person who manages the mutual funds and takes all the end decisions related to that fund. You may check the track record of this manager by looking at the returns generated by other funds managed by him/her.
This helps you to understand the expertise of the fund manager. Although assessing a fund manager is not much important in the case of passive mutual funds, it becomes especially important in case you are looking forward to investing in active mutual funds.
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Overlapping Stocks
If you also directly invest in stocks, then it becomes important for you to check the constituent companies of the mutual fund portfolio. Because if that mutual fund has a considerable weightage to the stock you are already invested in, it may disturb your diversification plan, as your returns would become too dependent on a single company.
If that company performs well, your returns would boom as well. But the exact opposite would happen if the stock of that company starts tumbling down.
Know Taxation
Knowing about taxation rules linked to mutual fund investments is important because the tax criteria is a key factor in deciding the end return in your hand. If you are familiar with the taxation rules of stocks, then you don’t need to know much more. Taxation of equity-based mutual funds is exactly like stocks, which means that LTCG of 10% over return crosses 1 lakh INR. LTCG or Long Term Capital Gains Tax would be applicable for funds sold after 1 year. Similarly, funds sold within 1 year would attract an STCG of 15% without any threshold.
Final Word
Planning to invest in mutual funds is a wise decision. The early you start, the better. However, you must also keep the 5 points mentioned above in mind. At the end of the day, it’s your money and you must be smart about it. If you are ready to start investing in a mutual fund, try the easy and hassle-free Navi Mutual Funds to get started.
Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
