Tips for investors looking for joyful ride with mutual fund investment

Last Updated : May 19, 2016, 11:55 a.m.

Everyone wants to build a pool of savings to deal with the uncertainties that may come at any point of our lives. Savings can be in the form of bank accounts, recurring deposits, postal deposits, fixed deposits or say mutual funds. Aligning with the title of the story, we will keep our eyes on mutual funds, which are a pool of money from various investors. Qualified professionals monitor the investments made in mutual funds and create a portfolio consisting of stocks, money market instruments, bonds, etc. This is done to minimise any market downturn risk.You only own the shares of mutual fund and not the individual securities. But you can be benefitted in a large pool of money invested by other investors in mutual fund. However, one must keep in mind a list of things with regards to mutual fund investment.

Analyse fund performance in detail

You must analyse the performance of mutual funds on various aspects. First, you should compare the performance of the mutual fund scheme of a company with its peers. After, there should be a comparison of the select mutual fund with its own benchmark, the information of which can be found in the offer document. Avoid getting influenced by the good show of a mutual fund in a particular quarter. Instead, you must look at the fund’s performance for a long-period of time to get a fair idea as to how it has faired on an average basis.

Overall expense ratio

Investors do get attracted in a mutual fund scheme that starts performing well. Mutual fund companies tend to start reducing its asset management charges with the growth in assets. So, you must look at well managed funds with lesser charges, preferably below 1.9% per annum. Unless you get extraordinary return by paying more for fund management, prefer the scheme having less requirement of expenses.

Asset size of mutual fund scheme

When the asset under management (AUM) is less, then it is considered a very risky situation as you won’t know the investors and their investments in the select scheme. In the event of any top investor making an exit, the performance of the select mutual fund will get adversely affected and other investors would feel the pinch. However, the risk is minimised with a larger AUM. Also, the expense ratio gets reduced with high scheme assets. You must review the asset size every quarter or after the first half of the year. Ensure you invest in 2-3 funds that address your investment objective so as to reduce the risk of dependence on only one fund and avoid market downturn risks.