An Asset management company professionally manages an investment scheme by pooling money from many investors to purchase securities such as stocks, bonds and other securities is called a mutual fund.
Before investing in a mutual fund, first you have to analyse a few basic things because of which you can earn more returns or else you may not get good returns or end up losing your investments.
Basic things to analyse before investing in a mutual fund?
How long will you invest in the fund?
Before starting to invest first decide what is your term plan - is it a short term or a long one. This is because as of now, there are different kind of mutual funds in which few give good returns in long term and few give good returns in short term. So select your mutual fund as per your term plan.
There are mutual funds which gives great returns (equity mutual funs only), but the risk factor is also very high. It is important to select a low risk scheme than a high risk scheme, if you do not have an appetite for risk. So, while analysing a mutual fund the first parameter should be: How much risk you are willing to take?. If you are prepared to take high risk for high returns, you should go for equity schemes, particularly the small cap schemes, which are very high in risk. Or else, stick to debt schemes that invest money in government securities and safe AAA rated bonds.
Main reason for investing in mutual funds is for returns. So, one should check how the expected returns are. Every mutual fund publishes returns since inception, as also 1, 2 and 3 year and 5 year returns. There are other websites, which also publish returns, NAV data, exit load, expense ratio etc. You need to examine all of these before you invest.
Past 5 years performance
Checking the performance of mutual fund from past 5 years, will give you a idea on the track record of the fund. For example, SBI Bluechip Fund has a superb track record of returns in the last few years. The fund has generated a return of alost 19 per cent on an average each year, in the last 5 years.
Fund managers track record
Track record of mutual fund managers assumes great significance. For example, HDFC Mutual Fund Manager has over the years, carved a spacial name for himself as a popular fund manager. You might want to invest in schemes where there is a popular fund manager at the helm.