Following are the ten important things to consider while buying mutual funds in India
- 1) Net Asset Value
- 2) Historic performance
- 3) Fund manager’s background
- 4) Investing style of the scheme
- 5) Asset allocation
- 6) Assets under management
- 7) Director Regular mutual funds
- 8) Growth or dividend option
- 9) Entry and Exit loads
- 10) Tax implication
1) Net Asset Value
Net asset value any mutual fund depicts its intrinsic value. Basically, it is a fund’s market value per unit. Based on net asset value, you will be allocated a number of fund units when buying mutual funds. However, you cannot decide investments just on the basis of net asset value as it is not an indication of future performance. Let’s say you have chosen two funds with similar kinds of portfolio, there can be NAV differences. A fund that has been around for a longer time would have higher NAV and the recent one would have lower NAV. Net asset value is an indicator of a fund’s performance on a daily basis. While buying mutual funds, you need to consider other factors like returns and scheme performance along with NAV.
2) Historic performance
You can easily get the returns of mutual funds for the last five to ten years and also since inception online. Though historical performance of the fund is not an indicator of its future performance, you can analyse how the fund has been performing in a different market scenario since its inception. You can compare two more similar funds performance for the selection of mutual funds. Basically, you should use historical performance of the fund to analyse the performance trend and consistency.
3) Fund manager’s background
When you invest in mutual funds, your hard-earned money is going to be managed by fund managers on your behalf. You must ensure you are giving your money in better and deserving hands for management. Hence, you can do some background checking of fund managers to get the confidence over their expertise.
4) Investing style of the scheme
While buying a mutual fund, it is important to know whether a fund’s objective is matching with your objective and risk profile or not. Every fund manager follows an investment style as required for the scheme’s objective. To make the right investment decision it is important to know the investing style of the scheme.
What are the different types of Mutual Fund schemes in India? Read more.
5) Asset allocation
In order to limit your losses in investment as per your risk profile, it is important to follow asset allocation. Each mutual fund allocates your investment into various asset classes like equity, debt and other securities based on the objective of the fund and the asset allocation that the fund manager would want to follow. It is important for you to consider asset allocation of the scheme that you are choosing to check whether that matches with your risk profile and defined asset allocation or not.
6) Assets under management
Asset under management or AUM in a mutual fund is the total cumulative investment value of that fund. AUM is an important consideration in the mutual fund buying process. Asset under management gives you a broad picture of the success of a mutual fund. Specifically, in case of debt funds, asset under management is an important fund selection parameter. Your expense ratio in debt funds can come down when you invest in a mutual fund with larger assets under management which will also have an impact on returns.
7) Direct or Regular mutual funds
When it comes to buying mutual funds, you can choose between direct or regular variants of mutual fund schemes. Direct fund refers to directly investing through asset management companies with paying any commission or distributor charges. Regular fund option is investing through distributors and advisors, expense ratio of which can be relatively more than that of direct funds. You can choose the one suitable for you, depending on your market knowledge and how you want it to work.
8) Growth or dividend option
When you select a mutual fund for investment, the portfolio of the fund will have many securities that may pay regular dividends. When you choose a scheme with a growth option, the dividend paid by the underlying securities is reinvested by the fund manager. When you opt for a dividend payout option, the amount of dividend will be paid out to your account. You can also choose a dividend reinvestment option in which the fund manager utilises the dividend amount to buy more shares. You can select the suitable option depending on your liquidity/ regular income requirement.
Lean how to choose the right mutual funds as per your needs.
9) Entry and Exit loads
Entry and exit loads are the amount charged at the time of buying and selling mutual fund units respectively. Usually, the open-ended schemes may not have entry and exit loads. If you are buying closed ended funds, this would be applicable. As entry or exit loads are a fraction of the net asset value, it will bring down your investment value. Hence, considering the entry and exit loads is an important thing while buying mutual funds.
10) Tax implication
Every mutual fund scheme can have different tax effects depending on the category it belongs to. There are also tax-saving mutual funds that allow you to avail tax benefit under Section 80C of the Income Tax Act, 1961. Tax implication will have a huge impact on a fund’s return, hence it is an important thing about buying mutual funds.
Read a detailed blog on The Concept of Taxation in Mutual Funds
Once you consider all the crucial parameters to buy mutual funds, your half work is done. You need to then do periodic reviews to arrive at the desired goal.
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