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Want to invest in Mutual Funds? Here is How to Invest in Best Mutual Funds

Jul 10, 2019 03:46 PM EDT

Do you want to include the mutual fund in your investment portfolio?

Are you confused about how to get started with your mutual fund investment?

 Then you don't need to worry. Mutual fund investment is pretty easy.  All it needs is just a bit of due diligence on your part. You can achieve your financial goals by keeping a good understanding of your own risk tolerance and by being clear on your investment objectives. While choosing the best mutual funds, you should go for funds which provide good returns at a low cost. It is even better, if your mutual fund scheme strategically enhances your portfolio and investment goals. 

Once you decide which mutual fund to invest in, there are several ways to analyze them such as checking the past performance of the funds, checking the expense ratios and history of the management team. Besides this, you can follow these tips in order to choose the best mutual fund investment plan to earn maximum returns. 

1.    Identifying Risk Tolerance and Goals 

Prior to making the investment in any fund, the first thing that you should do is to identify your goals for the amount being invested. Before making an investment, it is important to know that whether you want to make an investment to fulfil the long-term objective or short-term objective. By analysing your financial goals you can easily choose the best mutual funds to invest in. 

In addition to this, it is also important to consider personal risk tolerance. Can you deal with the market fluctuations in portfolio value, or conservative investment is a more suitable option for you. As risk and returns are directly proportional, it is important to balance your risk appetite against your desire for returns. 

Apart from this, the tenure of investment must also be addressed.  While choosing the best mutual funds, it is also important to keep in mind how long you want to stay invested in the market. According to the market experts, the longer you stay invested in the market, the higher returns you can reap in the long-term. 

Key Takeaways

  • Prior to investing in MF, investors should identify their financial goals.
  • Consider personal risk tolerance.
  • Should decide, the tenure of investment.

2.    Fund Type and Style

The major objective of growth funds is to generate capital appreciation. So, if you want to park your money in mutual funds investment with an objective to fulfil long-term needs and if you have a high risk appetite, then long-term capital appreciation fund is a good choice of investment for you.  These funds majorly invest a high percentage of their assets in equity stocks, thus, it is considered volatile in nature. As the level of risk is higher in this fund, they provide potentially higher returns over a long-term period. 

Capital appreciation or growth funds generally do not pay dividends. So, if you want to earn a regular income from your portfolio, debt fund can be a better choice of investment for you. In these funds the investments are majorly made in debt and money market instruments, thus the risk associated with the funds are low.  Therefore you can use these funds to diversify the holdings in the investment portfolio. In case, you want to stay invested for a longer tenure but are unwilling to deal with substantial risk, then you can choose to invest in balanced fund wherein the investment is made in both stocks and bonds. 

3.    Evaluate the Past Results and Managers History

One of the most important things to consider while choosing the best mutual fund is to research the fund's past performance. While reviewing the fund's track record, you should keep in mind the important points such as:

  • Do the results delivered by the fund manager are consistent with the general market returns?
  • Were the returns offered by the fund vary dramatically throughout the year?
  • Was the funds turnover where unusually high, which can result in large tax liability?

The answers to all these questions will not only explain the historical trend of the fund in terms of return and turnover but will also provide you insight into how the portfolio manager performs under specific conditions.

Prior zeroing in on a mutual fund investment, it is important to review the history of the investment manager's. The fund manager should guide you about the current market trends and should discuss the general industry that may affect the fund's performance.  

4.    Selecting What Really Matters

Along with evaluating the past performance of the fund, you should also take into account the different factors which influence future results.  Moreover, it is also important to take into consideration the different fees and loads associated with the mutual funds investment. Keeping your future financial objective in mind you should always choose funds which can help you deal with the market volatility and yet provides you with a higher return on investment over a long-term period. 

The Bottom Line

Choosing the right mutual fund may seem like a daunting task, but by doing proper research and by understanding your risk tolerance and financial objectives you can win half of the battle. So, if you consider this due diligence before choosing the fund then your chance of success will increase automatically.

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