Mutual funds have evolved over the years and become a popular choice among investors who want to create wealth. Mutual fund investment means pooling money from several investors to invest it in various financial instruments to meet several objectives.
You must choose the right mutual fund to meet your long-term or short-term financial goals to achieve the desired returns. Here are a few tips to ensure your mutual fund investments deliver the expected results.
Assessing Your Needs
- Identify financial goals and risk tolerance: Since mutual fund investment is a long-term investment avenue and has some risk element (when invested in equity funds) involved, one should be aware of how well the fund fits his financial ability, risk-taking capacity, liquidity, and other requirements.
- Understanding investment horizon: Different mutual funds have different horizons, which means they have a specific period of investment. A mutual fund can have a time horizon of short-term (1-3 years), medium-term (3-5 years), or long-term (10 years and more) depending on the securities the fund invests in and the fund objective.
Types of Mutual Funds
Based on their structure, investment goals, asset class, and risk. Let us see the different types of mutual funds.
- Based on the structure: Open-ended, close-ended, and interval funds
- Based on asset class: Equity, debt, hybrid, and solution-oriented
- Based on investment goals: Growth funds, tax-saving funds (ELSS), liquidity-based, capital protection, pension funds, fixed-maturity funds, etc.
Irrespective of the type of mutual fund you decide to invest in, you should monitor and evaluate the performance to rebalance the fund as and when necessary for better gains. One can use the mutual fund SIP calculator to know the estimated returns on mutual funds through SIP.
Evaluating Fund Performance
It is important to evaluate fund performance before investing. Some key metrics to evaluate the mutual fund performance are as follows:
- Expense ratio: This ratio shows how much percentage of funds is used for administrative, management, and advertising purposes.
- Return rate: It indicates how much is the return on investment.
- Historical performance: It shows the previous performance of the fund.
Management Style
The management style of the fund must sync with your risk-taking ability and objectives. Typically, funds are managed in either of the following ways.
- Active portfolio management: A professional manager manages your portfolio to make decisions by assessing and analysing market trends.
- Passive portfolio management: This style involves replicating the basket of funds to match a particular market index or benchmark.
Role of Fund Managers
A fund manager is responsible for implementing investment strategies, rebalancing the portfolio fund, and managing the portfolio activities of the investors for better gains. Hence, check the fund manager’s experience in managing the particular fund and the overall market experience before investing.
Diversification
Diversification means investing in different securities belonging to various asset classes, industries, sectors, etc. Having a diversified portfolio helps to reduce and spread the risk, thereby helping you achieve your financial goals.
Fees and Costs
Mutual funds are managed by companies and involve fees and costs in connection with different activities like:
- Investment advisory fees
- Investor purchases, exchanges, redemptions, etc.
- Management fee
- Brokerage fee
- Legal charges
- Accountant fee, etc.
Always learn about the fund charges, fees or expenses involved before investing. Expenses can impact your overall returns.
Tax Considerations
Mutual funds are subject to long-term capital gains tax (LTCG) or short-term capital gains tax (STCG)
| Type of Mutual Fund | Period of Holding for Long-term | Period of Holding for Short-term | Short-term Capital Gains Tax | Long-term Capital Gains Tax |
| Equity and Hybrid Equity-oriented Funds | More than 12 months | Less than 12 months | 15%+ cess + surcharge | Gains above ₹1 lakh is taxed at 10%+ cess + surcharge |
| Debt and Hybrid Debt-oriented Funds | More than 36 months | Less than 36 months | Taxed as per the income slab | 20% with indexation benefits |
ELSS or equity-linked saving schemes are tax-saving mutual funds. Investing in these provides the investor with a tax dedication of up to ₹1.5 lakhs under section 80C of the Income Tax Act.
Conclusion
Before investing in any mutual fund, you must acquire a sound understanding of the types of mutual funds, how mutual funds work, what a mutual fund SIP calculator is, what the tax implications are, how diversification helps, and how you can invest based on your financial goals. All this can help you to make a smart and beneficial investment.
