You have Rs. 1,00,000 ready-to-invest with you but you are not aware of investment avenues available. Having no knowledge about them nor having a Financial advisor along, you decide to invest in some mutual funds after watching a few advertisments like these:
Now that you have realized that mutual funds have low risk and deliver healthy returns, you plan to invest in them. (If you want to know more about mutual funds, refer to this article: What are Mutual Funds?)
But the underlying statement, “Mutual funds are subject to market risks”, makes you hesitate before investing. Yes, it’s true that mutual funds are not risk-free (recent case: Franklin Templeton Mutual Fund Shutdown), but there are certain elements that if you consider before investing, you can be assured that your money is safe.
Just like any stock, there are various aspects where after filtering, you may figure out the perfect fund for your investing profile.
1) Type of the Fund
Mutual funds are of three types – Equity, Debt and Hybrid. Equity fund invests in stocks, debt funds invest in bonds and debt securities and hybrid funds invest both in equity and debt. Equity funds deliver high return with high risk compared to debt funds where risk is low but returns are between moderate and low.
2) Portfolio of the fund
Every Mutual Fund House shows the portfolio of the fund on its website. Investors can check where their money is being invested.
3) Credit Rating
Credit Rating Companies check mutual fund’s level of risk, adjusted returns and its performance over the years. Higher credit rating can be considered as an increase in level of safety, but this doesn’t mean that lower rated mutual funds can’t outperform high-rated mutual funds.
4) Historical Performance
Past performance may not guarantee a positive future performance, but if a fund has been delivering consistent returns for the past few years or decades, then it shows that mutual fund can continue to deliver healthy growth in the future.
5) Fund Size
A large fund size portrays that the value of underlying assets have been increasing due to strong performance of stocks and/or bonds. But as the size increases, more investors are attracted to the fund and its manager is stuck with huge pile of cash. Inefficiency might start occurring and chances are that a small size fund might outperform.
Just like stocks, mutual funds have their own ratios. These ratios help us determine the fund correlation to market reactions and volatility. It also helps to identify risk for a fund. Ratios are a bit complicated, but once understood, they will help you find your suitable fund.
In a nutshell, it can be said that mutual funds are safe investments (provided that you have done thorough research on them). They will fluctuate in the short term, but will grow strong in the long run. Having them in one’s portfolio gives diversification benefits. Mutual funds have multiple options and categories, so a quick filter will definitely help you select your perfect mutual fund.
Thank You for reading!
Finance graduate with a strong desire to understand the complexities of financial markets. I make financial judgments for my investments based on the information I gained during my academic education. I write articles about financial literacy for dstreetanalyser.com in order to promote financial literacy among the general public.