Things to know before investing in a Mutual Fund

Mutual Funds

oi-Sneha

By Sneha B K

Published: Tuesday, April 30, 2013, 9:28 [IST]

Mutual Funds are increasingly becoming a popular investment option. While more and more people are investing in mutual funds, most of us fail to decipher the offerings of various mutual fund schemes. Every Mutual Fund group offers an array of schemes which differ in the following aspects:

Underlying asset - Underlying asset is where the money collected under the scheme gets invested. It can be in equity market, debt market or both. Funds investing in equities are called Equity mutual funds. Funds investing in bonds offered by companies and government are called Debt mutual funds. Funds that invest in both, equity and bonds are called Hybrid Mutual funds.

Mutual funds invest in other mutual funds and are called Fund of funds. The risks of mutual funds are governed by the underlying assets. Due to the intrinsic nature of equities and debt, Equity mutual funds have higher risk than Debt mutual funds.

Option of Fund Entry and Exit - An Open ended scheme allows investor to buy and sell units anytime. In Close ended schemes, no investor can enter the fund after the initial offering of the fund is over. While redemption is allowed anytime after the close period in these schemes, purchase of units is not possible, except from the secondary market.

Ways of redemption - Every scheme offers two options for redemption - Dividend option or Growth option.

Dividend option is one in which profits made by the fund are not re-invested and are paid out to the investor. Here, the value of investment made remains the same. The benefit of this option is that it provides regular source of money. This should be preferred when money is required in short term. The other benefit of dividend option is that it allows one to book profits and limits the investment exposure to the original amount of investment.

Growth option is one in which profits made by the fund are re-invested. The profits are converted into mutual fund units for the investor. In this case, the value of investment increases by the profits made. Growth option benefits more than dividend option as the profits reinvested reap further profits.

Before investing in a mutual fund, one should perform the following checks:

Where the money is being invested - If it is equity based fund, then one should know in which sectors major share of fund is invested.

Historic Performance - While it is important to see the current NAV (Net Asset Value) of the fund, it is also imperative to check the growth path of the fund. It may be possible that a fund may have achieved handsome gains because of which NAV stands high but, at present the performance of fund has become average.

Mutual Fund Ranking - CRISIL issues Mutual Fund ranking every quarter, which is available on its website. The ranking is done by experts after analyzing a number of parameters of the funds. It is very useful to check the ranking of a fund vis-a-vis its competitors before making an investment.

Other essential parameters - The size of fund corpus as well as age of the fund can be checked. A large size corpus indicates high investor confidence. If two funds have the same NAVs, the fund which has achieved the NAV in lesser time is better than the other one.

It is well known that mutual funds are subject to market risks and do not offer guaranteed returns. But making a well informed selection of the fund certainly improves the chances of reaping good monetary gains.

InvestmentYogi.com