Owing to a higher rate of return, tax savings and benefit of diversification, the mutual fund has become the most looked after investment alternative. However, before investing in any mutual fund, you should know the following factors about the fund you are going to invest in:
1. Size and performance
You need to study the size and performance of the fund very carefully. If the fund is too large or too small, it might affect the fund’s performance. For evaluating the performance of any fund, the comparison should be with a category-average fund.
2. Expense ratio
The expense ratio (or management expense ratio) signifies the percentage of the fund’s asset used for administrative, operational and other purposes. A higher expense ratio shows how much of the corpus utilised for managing the fund. For evaluating the expense ratio of any fund, the comparison should be with a category-average fund.
3. Risk reward ratio
It refers to the potential reward one can be earned for every penny that he has risked by investing in the market. It helps the investors to assess the highest risk associated with returns that he wishes to reap from the financial markets. An investor must seek a balance between the rewards he wants to achieve and the risk associated with the investment. One must assess his risk-taking capacity before investing in any fund.
4. Tax benefits
According to the Income Tax Act, section 80C allows a deduction up to INR 1.5 Lakhs for investments made in ELSS (Equity Linked Saving Scheme) funds. These funds tend to provide a good return as well as tax benefits to their investors. However, one should also consider that there is a lock-in period on the said security. It means the investor cannot withdraw his funds before the lock-in maturity period.
5. Type of equity funds
There are various funds available in the market. Based on market capitalisation, they can be named large-cap, mid-cap, small-cap funds. Based on nature, they can be equity, debt and hybrid funds. There are also sectoral funds that only invest in a particular sector, e.g., IT industry, pharma sector, etc. Other funds are also available. Growth funds, thematic funds, value funds and contra funds are some of the examples. There are mutual funds for every investor. It depends on your nature, preference and risk tolerance ability.
Mutual funds are a good option if you want to invest to earn a good return on investment while at the same time having a healthy risk appetite. There are a lot of factors that you should consider before making any investments.