Diversify and evaluate costs for better returns

Diversify and evaluate costs for better returns

Basically, a mutual fund is a collection of money (funds) from many investors. This pool of money is managed by professional money managers, for investments in market instruments. Investors who pool money by buying mutual fund units are its shareholders (unit holders).

Fund managers invest this money and buy securities such as stocks and bonds. A mutual fund can make money from its securities in two ways - a security can pay dividends or interest to the fund or it can rise in value.

Advantages of investing in mutual funds include professional management of funds, research of securities, investment diversification, variety, liquidity, affordability, convenience, government regulation etc.

On the other hand disadvantages of investing in mutual funds include payment of charges regardless of fund's performance and lack of control on investments made by fund managers.

Diversify and evaluate costs for better returns

First of all it is important to ascertain and identify your financial needs and goals before taking investment decisions.

Financial needs/goals could be short or medium-term goals like planning for a vacation, creating an emergency fund etc, and long-term goals like a child's education, retirement planning etc.

Identifying your financial needs and goals helps in selecting the investment instruments and quantum of investments.

There are many flavours in mutual funds available in the market and their offerings vary from low risk and low return to high risk and high return funds.

 

Liquid mutual funds

 

Liquid mutual funds invest in safe instruments like government securities. This a good option for investors looking at parking their money for a short term.

Investments in liquid funds are fairly liquid. An investor can enter or exit from the fund at any point in time. Thus, if short-term liquidity is your highest priority you can look at investing in liquid mutual funds.

Debt funds:

Debt funds and balanced mutual funds are safer investment instruments. Balanced funds invest a certain portion of their corpus in blue-chip stocks and hence they provide better returns. Investors with a low risk profile should invest in balanced mutual funds.

 

Equity funds

 

There are various schemes and investment instruments available in the market in this category. Investors should be careful while investing in equity mutual funds.

Usually, the high beta funds perform very well in good market conditions but on the flip side, they under-perform the market in adverse conditions. Investors should go in for a basket of equity funds with different themes in order to diversify their risk in the market.

Tax-saving mutual funds:

These are also known as equity-linked savings schemes (ELSS). Investments in a tax-saving fund provide rebate under Section 80C of the Income Tax Act.

These funds come with a lock-in period of three years and invest a major portion of their funds in equity and equity-based instruments. Investors should select a scheme carefully after studying the fund performance, expenditures likely to be incurred, and method of investments.

 

Unit-linked insurance plans (ULIP)

 

Investments in these funds come bundled with insurance. These funds invest the money in equity or related instruments and deduct a portion of the investors' funds to provide them insurance cover. Investors have the option to select a debt fund or equity fund for their investment.

Investors should select the scheme carefully after studying the fund performance, management fees and chances offered to switch between funds, based on market conditions.

Gold funds:

Investments in commodities, especially gold, have picked up in recent times. The gold-based investments add another dimension to a portfolio. It acts as a debt instrument and usually provides good returns during uncertain economic conditions. Investments in gold based funds (exchange-traded funds) are a good way to take positions in gold rather than physically holding it. It is much safer to hold than the metal and is easy to liquidate in the market.

 

Points to keep in mind

 

Here are some points investors should keep in mind while planning a mutual funds portfolio:

Diversify: Don't put all the eggs in one basket. Look for diversification of your investment instruments.

Targets: Always have realistic expectations of the investment's performance. Try to understand why a fund has the capability to out-perform (could be due to the sector or experienced fund manager). Remember, the past performances of the instrument may not be repeatable.

Charges: Consider the fees, loads and taxes applicable on the investment