6 KEY QUESTIONS THAT MUTUAL FUND INVESTORS SHOULD ASK
Once you have identified mutual funds as your investment class, the next important task is to select a scheme or set of schemes that can help you meet your goals.
Here are a few things to consider:
1. Match Your Objectives - When it comes to investments, knowledge is the key. Fund performance is important, but simply picking up last year's top performing funds is not the right approach because these are ever-changing set. Before arriving at a decision it is necessary to consider key micro and macro economic trends, and to align your investment objectives with those of the scheme. In case of equity investments, it is ideal to remain invested for a long term.
2. Charges and Fees - Every investment comes with its own set of expenses - like transaction cost, advisory fees, sales and purchase fees and the fund manager's expenses. Based on this information, one can calculate the expected return on investment. Ensure that your fund house is efficient and does not impose unreasonable charges/ barriers.
3. Risk v/s Reward - Your mutual fund scheme should have an allocation as per your risk appetite (conservative, assertive, aggressive, etc.). Remember, if you are prepared to take more risks, the scheme should have the potential to provide better returns over the longer term.
4. Tax Treatment - Just like stocks and bonds, mutual funds' tax liabilities are based on short-term and long-term capital gains. In fact, as an investor, you should consider the 'post-tax returns' while calculating the absolute returns from a scheme.
Ask questions like:
- Is the invested amount tax exempted?
- Is there a lock-in period to avail the said tax benefit?
- Are the returns tax exempted? What about the dividends and payouts?
5. Evaluate long-term performance - The best metric to evaluate a scheme is its long-term performance. Along with the average rate of return, see if the scheme has been able to meet its investment objectives. Evaluate its long-term performance vis-a-vis similar funds in the market. Also consider key portfolio parameters to ascertain if the fund is taking undue risks, etc.
6. Fund Manager's Capabilities and Investment Processes - Just like any other investment, the performance of a mutual fund scheme largely depends upon the experience and expertise of the fund manager and the processes it adheres to while managing your funds. Before handing over your hard-earned money to them, learn about their credentials and their abilities to achieve the scheme objectives even in challenging market conditions.
Risks Associated with MF investments
'Mutual funds investments are subject to market risks, please read the offer document carefully before investing' is a much repeated, but crucial advice. Market risks can be in the form of economic, financial and political factors that might affect your investments.
Market risks are broadly classified into two types -systemic and non-systemic risks.
· Systemic risks are the ones that affect the entire market. It includes volatility in the stock market (equity risk), interest rates (interest risk), foreign exchange rates (currency risk), changes in commodity prices (commodity risk), political factors prevailing in a country and even extreme changes in weather.
The most effective way to counter systemic risks is to look for investment ideas that can counter volatility of the markets.
· Non-systemic risks affect investments of a particular sector or industry. While systemic risks are usually unexpected and unavoidable, a diversified portfolio can reduce the impact of non-systemic risks.
An investment in mutual funds, like any other, requires a thorough understanding of how various markets operate. Investors should understand that risk and reward go hand in hand and are a part of every investment.
Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
Source : www.timesofindia.com Thu, Feb 08 2014.
Here are a few things to consider:
1. Match Your Objectives - When it comes to investments, knowledge is the key. Fund performance is important, but simply picking up last year's top performing funds is not the right approach because these are ever-changing set. Before arriving at a decision it is necessary to consider key micro and macro economic trends, and to align your investment objectives with those of the scheme. In case of equity investments, it is ideal to remain invested for a long term.
2. Charges and Fees - Every investment comes with its own set of expenses - like transaction cost, advisory fees, sales and purchase fees and the fund manager's expenses. Based on this information, one can calculate the expected return on investment. Ensure that your fund house is efficient and does not impose unreasonable charges/ barriers.
3. Risk v/s Reward - Your mutual fund scheme should have an allocation as per your risk appetite (conservative, assertive, aggressive, etc.). Remember, if you are prepared to take more risks, the scheme should have the potential to provide better returns over the longer term.
4. Tax Treatment - Just like stocks and bonds, mutual funds' tax liabilities are based on short-term and long-term capital gains. In fact, as an investor, you should consider the 'post-tax returns' while calculating the absolute returns from a scheme.
Ask questions like:
- Is the invested amount tax exempted?
- Is there a lock-in period to avail the said tax benefit?
- Are the returns tax exempted? What about the dividends and payouts?
5. Evaluate long-term performance - The best metric to evaluate a scheme is its long-term performance. Along with the average rate of return, see if the scheme has been able to meet its investment objectives. Evaluate its long-term performance vis-a-vis similar funds in the market. Also consider key portfolio parameters to ascertain if the fund is taking undue risks, etc.
6. Fund Manager's Capabilities and Investment Processes - Just like any other investment, the performance of a mutual fund scheme largely depends upon the experience and expertise of the fund manager and the processes it adheres to while managing your funds. Before handing over your hard-earned money to them, learn about their credentials and their abilities to achieve the scheme objectives even in challenging market conditions.
Risks Associated with MF investments
'Mutual funds investments are subject to market risks, please read the offer document carefully before investing' is a much repeated, but crucial advice. Market risks can be in the form of economic, financial and political factors that might affect your investments.
Market risks are broadly classified into two types -systemic and non-systemic risks.
· Systemic risks are the ones that affect the entire market. It includes volatility in the stock market (equity risk), interest rates (interest risk), foreign exchange rates (currency risk), changes in commodity prices (commodity risk), political factors prevailing in a country and even extreme changes in weather.
The most effective way to counter systemic risks is to look for investment ideas that can counter volatility of the markets.
· Non-systemic risks affect investments of a particular sector or industry. While systemic risks are usually unexpected and unavoidable, a diversified portfolio can reduce the impact of non-systemic risks.
An investment in mutual funds, like any other, requires a thorough understanding of how various markets operate. Investors should understand that risk and reward go hand in hand and are a part of every investment.
Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
Source : www.timesofindia.com Thu, Feb 08 2014.