Things to consider before investing in Mutual Funds

One of the biggest roadblocks in mutual fund investment in particular (and investments in general) is a very basic one: getting started in the first place. Most persons, especially new investors, keep putting off the investment on one excuse or another. It is a problem not only for the new investors, even the older and experienced investors sometimes find it hard to keep up the fiscal discipline needed for successful investing. Once the investor gets over this initial hiccup, investing essentially becomes easy. Yet, there are a few things that the mutual fund investor must remember to become successful in the long run.

Mutual Funds for best Investments

These points are mostly common sense, yet the investors fail to remember them. If an investor pays sufficient attention to them, she will be able to avoid the pitfalls of mutual fund investment, and will be able to meet the investment goals successfully. In essence, an investor must remember to look out for the following points before venturing into the world of mutual funds:

1) Fees and Expenses:

Have you ever seen a bucket with a lot of holes? What will happen if you fill water into this bucket? Well, the answer is obvious! What is most surprising is that we fail to apply this logic to our investments. The investor must be careful about the various expenses and fees imposed by the mutual funds. A 1% here and a 1.5% there may seem insignificant, but may add up very quickly. Also, be careful about the entry and exit loads imposed by mutual funds.

2) Tax Implications:

There is more to a mutual fund fund than the capital gains tax. Understand the tax implications of your mutual fund investments very thoroughly. When will the investment become taxable, what is the likely amount of taxes and how the tax is to be paid are some points to ponder. Also remember what is your tax bracket when you combine your mutual fund income, since this may affect you overall tax amount. This aspect may also have a bearing upon whether you chose a growth fund or an income fund.

3) Age and Size of the Fund:

The age and size of the mutual fund may give some important indications about the performance of the fund. While it is true that past performance is no guarantee of future performance, it may give some insight into the investment approach and philosophy followed by the fund managers. It may indicate whether the fund managers have been prudent with the investors’ money, and whether they have invested money as per the aims and objectives of the fund. The size of the fund is also important, since it will indicate the effect that a single scrip or stock have on the NAV of the fund.

4) Nature and Volatility of the Fund:

As an investor, you should be very clear about the risks involved with the investments. Risk is an inherent part of investment, and will accompany every investment, including mutual funds. There is absolutely NO financial instrument which is totally risk-free. What may differ is the degree of risk associated with a particular investment. Therefore, beware of any fund which claims to the contrary. Also, the expected rate of return is proportional to the amount of risk. Check carefully to see whether the risk-return profile of the fund is aligned to your peculiar investment objectives. For example, if you are an aggressive investor, looking for substantial growth in your funds, then you should look for equity based funds. Conservative, debt-based funds will never do the trick for you.

It is always advisable to be prudent in case of investments. After all, it is your hard-earned money, and it would only be proper to expect that you would be careful with your money. Investigate, and then invest. Keep the above mentioned points in mind, and you will not go wrong. Happy investing!