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A Guide to Choosing the Correct Type of Mutual Fund

Updated on April 17, 2016

Invest in Equity Funds for Wealth Creation: Choose the Correct MF

Types of MF Investments

Logging their first net outflow in 21 months (since May 2014), mutual funds have pulled out nearly Rs.5,200 crore from stock markets in March 2016 on profit booking. An inflow of over Rs.70, 000 crore has also been registered for FY 2015-16, according to an article published in MoneyControl.com in March 2016. MF investments are considered to be an effective tool for building a significant corpus.

There are primarily three types of MF: debt, equity and hybrid. Debt schemes park their corpus in debt and money market securities, such as treasury bills and certificate of deposits. They tend to carry less risk and offer lower returns. Equity mutual funds, on the other hand, park their corpus in equity and related products. Being exposed to market volatility, they tend to exhibit higher risk and also offer higher returns. Hybrid invests in different types of securities.

Identify Your Goal

Before you set out to invest in any particular scheme, you must identify your financial goals and the objective of your investment, says an article in the Times of India. Your goal might be savings or wealth creation. Identifying your goal will give you a clear idea of the types of MF you should invest in. Each type of scheme has an underlying objective. For example: debt has savings as its objective, while equity has growth.

Furthermore, you must also determine your risk appetite. Risk arises from the fact that you can lose the money you invest. Your risk appetite might depend on your age, savings, income and responsibilities. You can take help from a financial advisor to do the same. You can opt for diversified equity funds as they can give you better risk-adjusted returns in the long run over all other investment classes. Moreover, it is advisable to keep equity as a foundation for a long-term portfolio, says an article by Birla Sun Life Equity Mutual Fund.

Assess The Fund’s Performance

Before parking your money in any particular scheme, you must assess its performance over the short, medium and long term of six months, three years and five-to-ten years, respectively. You must also calculate its risk-adjusted returns. Risk-adjusted returns can be calculated by comparing a fund’s performance to that of any other security of the same value carrying zero risk (such as government treasury bills) over a period of time. You must choose a scheme that has surpassed the benchmark consistently over a long period of time. You can also know more about any particular fund by going through the various ranking and reviews published by finance research portals. Such reviews will include the current valuation, investment info, peer comparison. CRISIL ranking and returns.

Know The Fund House

You must also go through the reputation and objective of the AMC. Check the credentials of the portfolio manager including his experience, investment style, and his past performance.

Know the Fees and Tax Implications

Being professionally managed, MFs come with various charges and fees such as transaction cost, annual management expenses, advisory fees, sales and purchase fees. So find out about all fees before making a decision. You must also know about the tax implication of any scheme so as to avoid surprises later on. Make sure to calculate returns post taxation and payment of annual fees to make a smart decision.

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