WHAT IS A MUTUAL FUND?

WHAT IS A MUTUAL FUND?

Mutual fund investments have been widely popular among investors owing to the several benefits it provides to its investors. If for some reason you have been living under a rock and are unaware about this amazing investment vehicleto generate or preserve wealth, don’t worry, we have got your back. In this article we will understand the meaning of mutual funds and everything you need to know about them.

What is a mutual fund?

A mutual fund is an investment vehicle wherein a fund house or an AMC (asset management company) pools the money collected by several investors and invests in different securities such as equities, debt, money market instruments, etc. basis the objective of the fund. This pooled investment is professionally managed by a fund manager who along with a team of analysts and researchers choose the best types of mutual funds to invest on behalf of the investors. These fund managers are mutual fund experts who hold experience and required knowledge to manage an investor’s investments. In return, the fund housecharges a small fee known as total expense ratio (TER) to investors to manage their mutual fund investments.

Things to consider before investing in mutual funds

Before you invest in mutual funds, you must consider the following parameters:

  1. Investment goals
    There is no ideal type of mutual fund. Different mutual funds are suitable for different types of investors. Before you zero in on any type of mutual funds, it is important that you first draft a financial plan and evaluate your investment goals, risk profile, and investment horizon.

  2. Fund manager’s experience
    A fund manager plays a pivotal role in determining the performance of your investment portfolio. Though one might point that investing in mutual funds is a process-oriented approach, however, the fund manager has the final say.

  3. Expense ratio
    A higher expense ratio could mean lower take-home earnings for you. Thus, it is important to check the expense ratio of your fund before you decide to invest in them. A good expense ratio could be in the bracket of 0.5 to 1.5% of your earnings.

  4. Past performance
    It’s a good idea to check the past performance of the scheme across various market cycles to understand how the fund is likely to perform at various cycles. A fund with a consistent track record across both bull and bear markets could be a good sign.

  5. Comparing the performance of your fund against underlying benchmark index
    A benchmark index is a standard against which the performance of a particular mutual fund scheme can be compared. It’s a good idea to compare the performance of your fund against underlying benchmark index as it will give you a clear picture about the actual performance of your fund against its peer.

You can also use a mutual fund return calculator which will help you evaluate the future value of your mutual fund investments. Having an idea about the returns that you are likely to earn after a given period of time will help you to plan your investments and investment portfolio in a better way. Happy investing!

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