Beginner's Guide to Investing in Mutual Funds

Mutual funds are ideal for investors who don't have time or the ability to choose stocks.

Individual investors are increasingly turning their mindset towards mutual fund investments because of the benefits they offer. The most essential elements that divert investors mind to invest in mutual funds is the concept of diversification.

• You can begin with a small amount (as low as Rs. 100)
• Diversify your portfolio by investing in a variety of equity, debt, balanced, tax-free mutual funds.
• Begin automating your monthly investments (SIP)

Mutual funds investment is a good option to start, for beginners. They are simple to use and do not require a deep understanding of companies financial statements. Mutual funds are more safe for investing rather than buying stocks of any single company which is more likely to bankrupt or shutdown. You can delegate the selection of individual stocks, bonds, and other investments to professionals through mutual funds. As a result, mutual funds are an excellent choice for investors who prefer to take a hands-off approach.

Pick any sector of the stock market, and a mutual fund will help you to invest in it. There are mutual funds to provide such exposure, whether you want to own only the largest or smallest Indian stocks; if you want to invest in the United States or South America; whether you want the security of bonds or the income from real estate without having to own either directly.

You are probably already invested in a mutual fund or you have an employer-sponsored retirement plan. however there are many funds which place you in a target-date retirement fund. If you're thinking about investing in mutual funds, here's what you should know:

Why You Should Invest in Mutual Funds?

A mutual fund is a type of investment that pools a big amount of money from multiple investors to buy a group of securities such as stocks or bonds. When you buy shares (units) in a mutual fund, you are investing in different companies. Different types of investors use mutual funds, and such investment is good for newcomers or those who don't have a lot of money to begin with.

You can buy a mutual fund instead of buying individual stocks, which requires more effort, research, and risk. It is necessary to understand the basics of mutual funds before you decide to invest in them. You have a portfolio of several assets with one single investment, which automatically diversifies your investments and significantly lowers your risk.

Fund managers oversee the management of mutual funds. Based on their investment philosophy, these managers perform research and select mutual fund securities. Fund managers may choose securities based on a variety of factors, such as valuation metrics or historical performance. The mutual fund is a perfect investment for passive investor because fund managers monitor the fund's performance and manage the portfolio's risk.

When the value of the funds assets rises, you make profit. You will make more money as the value of the assets in your portfolio rises. Your net profit is calculated as the difference between the funds expenses and earnings. You could lose money if the funds investments fall in value. 

All investments have a cost, but mutual funds are well-known for their low cost, accessibility, and low entry barrier.

What factors you should consider when selecting mutual funds for your portfolio?

There are large number of mutual funds available in the market, below checklist helps you to identify, examine and select the best mutual fund for investment:

Your investment objective and timeline:

Before you start with mutual fund investment journey you should focus on your investment goal and time period. These two factors will assist you to decide which form of mutual fund is best for investment. Long-term investors can take more risk because they have more time to handle any stock market crash.

Asset allocation:

The percentage of your overall portfolio invested in different asset classes, such as stocks (small and large, domestic and international) and bonds, is considered as asset allocation. A younger investor with a longer time horizon can adopt a risky approach to asset allocation. According to experts, as you become older, you should modify your asset allocation and become more conservative.

Costs:

It is important to cut your investing expenditures because as expenses increase, they can bring down returns over time. so, before you select any mutual fund, you should think about mutual fund management and transaction fees, as well as other operating costs. Fees such as sales load, redemption fees, exchange, account and purchase fees, as well as annual operation charges, are imposed on investors. 

To learn more about the charges and fees of holding a mutual fund, check the prospectus.

If you have a choice between funds and it comes down to cost, the more cost-effective one may be better in the long run.

What is the Best Way to Evaluate Mutual Funds?

Once you select the mutual fund you want to invest in, keep these crucial points in mind. 

Fund Managers

The people at the heart of a mutual fund are its fund managers. They are the individual or companies in charge of the fund's investments and management. Fund managers are in charge of monitoring portfolio assets, implementing the fund's investment plan, and conducting extensive market research in order to make informed decisions for the fund they manage.

The fund manager's responsibilities are very important as their actions have an impact on the amount of money an investor makes. You can learn more about a mutual fund's management by looking at the past performance, prospectus, or other resources available through your brokerage.

According to experts, it is advisable to search for fund managers that have many years of expertise investing in both positive and negative markets. The fund manager's background, expertise, and education all play important part in the fund's credibility.

Performance

Focus on the long term scenario while assessing performance of mutual fund. Look for mutual funds that have a good long-term track record when compared to other mutual funds that invest in the same market segment.

Short-term fund performance is important to analyse, but it may not be as important when evaluating long-term prospects of mutual fund.