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Factors to consider before investing in a mutual fund

By Religare
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People invest in mutual funds to save money and to earn returns that are higher than those associated with guaranteed investments. But before investing in any mutual fund, the information given in the prospectus which includes investment objectives, risks, charges and expenses should be considered very carefully.

As there are numerous mutual funds to choose from it is important for an investor to choose a mutual fund that will help in achieving the investment objective. A diversified portfolio has a variety of funds that invest in different asset classes. It is very important to understand what a fund invests in, how it fits into the overall portfolio, and how it attempts to achieve its investment objective.

 

The short and long term performance of a mutual fund is also critical to predict the future performance of the mutual fund as investing styles and asset classes tend to move in cycles. An investor should also know the mutual fund's total return for the last 10 years as comparing long-term performance can indicate how a fund has performed through various market cycles. But it should be noted that past performance is no guarantee of future results.

A mutual fund's standard deviation may indicate how great the range between a fund's highs and lows might be. The higher the standard deviation, the more a fund's performance may vary from its average year-to-year performance, and the more volatile it may be from year to year.

The fund's turnover ratio and expense ratio may also be considered before investing as a fund that trades frequently may generate high taxable capital gains, even if the fund has had a negative return, and also will have higher trading expenses than a lower-turnover fund.

The fund manager's tenure in running the mutual fund is also key as a manager who is relatively new to the fund may not be able to predict its past performance record and strategy accurately.

Also, the investor should have detailed information about the type of risks associated with the mutual funds they are planning to invest in.

Story first published: Monday, July 27, 2015, 23:00 [IST]
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