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This Investment Instrument Stands to Give You the Best Possible Returns

Updated on April 17, 2016

Mutual Funds: One of the Best Investment Option in India

Why Invest in Mutual Funds?

Fund managers have offloaded shares to the tune of approximately Rs. 5,200 crores on profit booking in the month of March 2016. Despite this huge outflow, the total inflow to mutual funds in the financial year 2015-16 was registered to be more than Rs.70,000 crores, says an article published in The Economic Times in March 2016. If you have surplus cash in hand and are planning to invest the same, then you could be overwhelmed by the choices at hand. Some of the most popular investment options in India include fixed deposits, stock market, mutual funds, gold and real estate. Mutual fund (MF) investments are considered to be one of the most effective tools for building a significant corpus. It is ideal for savings, retirement planning and wealth creation.

When to Invest?

One might ask what the right time to invest in a mutual fund might be. The answer is Today! Investors in the stock market believe that to maximise returns, you must buy shares during the bull market and sell them off when the market is at its peak. However, this requires you to time the market. In reality, you can only predict the market and not time it. MFs eliminate the need to time the market, since you can benefit from purchasing the same number of units at a low price when the markets fall as well as from the higher scheme valuation during a bull market. However, there are some things that you must consider before investing in MFs.

Identify You Goal

Know the objective with which you are investing your money. This will help you determine the type of scheme you should invest in. Every scheme has a different objective. For example, debt schemes have savings as their primary objective, while equity has growth. You must also know your risk appetite. Risk arises from the fact that you can incur losses on your investment. In case you are risk averse, you can park your money in less volatile investment options in India, such as debt and money market instruments. They offer interest based returns. MFs invested close to Rs. 2 lakh crores in the debt market from April 1 to November 19, 2015. During the same period, MFs invested just a little over Rs. 55, 000 crores in equities, says an article published in NDTV Profit in November 2015. Equities being highly volatile in nature entail higher risk.

Know About the Various Charges and Fees

Since MFs are professionally managed, they come with various charges and fees, such as transaction costs, advisory fees, sales and purchase fees and other expenses. Make sure to keep these charges in mind while calculating your expected rate of return. The lower deficit target in Budget 2016-17 has been applauded by fund managers. It is believed that the measures announced in the budget will bring macroeconomic stability, which is expected to lower fund costs, says an article published in The Economic Times in March 2016. You can also consider investing in Index Schemes. They are not actively managed by professionals but also mirror the market.

Evaluate Past Performance

While evaluating a scheme’s performance, make sure to consider its past performance over the short, medium and long term windows of 6 months, 3 years and 10 years, respectively. Also, evaluate the risk-adjusted returns by comparing the returns to that offered by securities of the same value that carry zero risk, such as government securities. Also, check the fund manager’s past performance, experience and investment style.

Know the Tax Implications

Although mutual funds are considered to be one of the best investment options in India for wealth creation, they also carry tax liabilities. You should learn more about the tax implications of investing in a particular scheme. Also, calculate the post tax returns to make a smart decision.

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