When choosing mutual funds, checking past returns is often the prime and easiest way for an investor to make an informed investment decision. They often trust the mutual funds that have provided the best returns in the past. However, this is not the best way to make a choice. So, how to invest in mutual fund? Industry experts say that focusing on past returns isn’t the best parametre, since it could make the investor settle for a mediocre manager with a streak of good luck, while a great manager is seeing bad times.
Investors should consider the fund manager’s history, size of the funds, consistency of the funds over the long term, along with the performance of the funds, to make the right choice.
Here are four things you should never do when choosing mutual funds.
1. Avoid Too Much Diversification
Mutual fund diversification comes with multiple benefits. If one investment doesn’t perform well in a given timeframe, others may perform better during the same time. This helps minimize risk of loss. However, diversifying investments into too many holdings makes it really difficult to monitor and track the performance of all types of mutual funds.
2. Never Ignore Costs
There are always some hidden charges, which could include entry and exit loads and expense ratio, such as investment management and advisory fees, custodian fees, transfer agent fee and expenses, and various otheroperational expenses. All the money that mutual funds charge as cost will have a direct impact on the returns. So, rather than looking for just a low-cost mutual fund, understand the hidden charges involved.
3. Do Not Ditch an Investment Early
Impeccable performance of an equity fund in the short term is often extrapolated by companies to estimate long term performance. This creates an illusion that the fund can be more fruitful than it actually is. Equity mutual funds are highly suitable for long term investment of not less than 3-5 years. This way, the returns on the investments stay unaffected by the interim volatility in the holdings.
4. Don’t Think of Mutual Funds as Just Equities
Equity mutual funds with immense benefits are highly popular in India. They are categorized according to the size of the company, geographical location and investment style of the holdings. These funds invest principally in stocks, which can be managed actively or passively. However, these are not the only kind of mutual funds available. There are many fixed income funds, which include corporate or government bonds, that give you returns at fixed intervals.
Once you know how to invest in mutual fund,do your homework to compare different funds. Consult your investment advisor and understand the different options available to make an informed decision, while taking into account your risk appetite and investment horizon.