5 things you should know before investing in any Mutual Fund schemes
Just the way you perform an
extensive research on different features before buying a laptop such as RAM,
Processor, Operating System etc., you should also do the same research before
you invest in any Mutual Fund scheme. Let us help you with some parameters
which will help you choosing a fund.
1) Past Performance
It’s very important to know how the fund has performed in the
past across various market cycles. Every fund has been benchmarked to an index
to evaluate their performance according to the portfolio construct.
The Fund Manager’s job is to outperform the benchmark consistently in the long
run. The fund might have delivered 15% CAGR but failed to outperform its
benchmark, which means that the fund manager is not at the best of his/her
abilities. Understand thepast performance,
even though that is not an accurate parameter to learn the future performance.
2) Investment Philosophy
Although
the performance of the fund determines the quality of the portfolio, the investment philosophy determines the consistency in the
performance. For e.g. if a fund has an investment philosophy of “Buy &
Hold” which means the Fund Manager will not churn the portfolio frequently
instead he/she will research the market extensively before he/she buys so that
he/she can hold the funds for the years to reap the full growth potential
returns. This philosophy may suit the investors who believe in wealth creation in the
long run.
3) Portfolio Holdings
Class of
the diversification in the portfolio comprises of the holdings of various
stocks. A perfect mix of different sectors and limiting it to the beneficial
ones determines a good quality portfolio. This may help you understand the quality of the funds.
Investing then is a wiser decision with a good holding pattern and
diversification across the sectors.
4) Exit Load
This load
is charged on the redemption amount, it varies from 1–3% depending upon the
fund. Since the exit load is deducted on the redemption value, the higher the value, the
higher will be the exit load. Hence you should be very careful about
the exit load being charged on the fund as there are funds available without
any exit load.
5) Product Labeling
As SEBI guidelines have made it mandatory, every scheme have
been labeled according to the level of risk involved through pictorial
representation called Riskometer. The level of risk has been categorized such
as Low, Moderately low, Moderate, Moderately high and high. Hence it is
essential to evaluate your risk tolerance before you choose a scheme.
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