6 Things To Know Before Investing In Mutual Fund

6 Things To Know Before Investing In Mutual Fund

Investing in mutual funds is one of the most successful and profitable ways to generate returns and build a long-term corpus.
However, investing in mutual funds is not a challenging task, but you need to conduct research analysis and choose the one that fits your requirements.
But before taking a step into the world of mutual funds, here are few essential things that you need to know in order to have a good investing experience.
This article will focus on six important things that you must know before investing in mutual funds.

It is essential to understand that risk involved in every category of a mutual fund is different. You cannot judge a particular mutual fund by saying it has a high risk or low risk based on a certain analysis or parameter.
If you’re looking to invest in direct equity, then compared to this, equity funds have a very low amount of risk involved.
But the risk involved with every category of a mutual fund is entirely different. So before looking to invest in any type of mutual fund, you should check the risk of a specific mutual fund in which they are looking to invest.

The second most essential thing you should know before investing in a mutual fund is the expense ratio of the direct plan is less than standard plans. It is because direct plans help to give better and larger returns in comparison to standard plans.
Several investors think that there is much difference between direct plans and standard plans of mutual funds. That’s not true at all. Both the plans are just the same for a particular scheme.
The only major difference is that there is no broker or agent in a direct plan, so there is no commission or brokerage.
It generally means you need to pay the lower annual cost and lower cost of funds to pay for your investments.

Mutual funds are known for their annualized returns. This can give you a hint that you will get the same percentage of returns every year.
Suppose you have a certain Mutual fund scheme, where the annualized returns is 8%. It doesn’t mean that you will get 8% of the return every year because the returns of every mutual fund are not the same every year.
For example:
While some mutual fund scheme may give you +15% returns in the first year, the same mutual fund will give you -5% in the next year.
There can be fluctuations in the returns of a mutual fund, so you have to be ready to see the fluctuations in your yearly returns.

A specific mutual fund giving 15% returns every year is way better than a mutual fund scheme giving +15% returns in the first year and -8% returns in the next year.
Consistent returns is far better than the variability of returns because the chances of losses are very little, and you can get a higher chance of earning respectable returns.
For example, a 5% fall in the first year means the mutual fund has to make 11% returns in the second year to cover the loss of returns which was 5% in the first year.
So getting a consistent percentage of return will help you gain better and large returns annually for a long-term basis.

Investing through SIP’s will help you to gain benefit from market volatility because when there is a downward trend in the market, you will have the opportunity to grab more units for the same price.
Doing this will bring down the overall cost of investing, which is known as Cost Averaging. The cost averaging will help you to gain a good amount of returns on the long term basis.
Not only it will help you to get the benefit, but also it will help you to teach discipline, which is an essential factor while investing in mutual funds.

The timing factor is the most important factor to understand while investing in mutual funds. First, you must know when you should invest.
It doesn’t matter whatever the market situation is; you can invest when the market is rising or falling as both are profitable.
Investing in mutual funds require lots of practice; despite market fluctuations, mutual funds provide decent returns and growth over a period of time.
It is proven that when you invest in a fixed amount regularly, for example, SIP, the same investment buys additional investment when the prices tend to remain low.
Thus you must clearly understand the timing factor and should clarify whether the bull is running the market or bear is bringing down.

  • Does investing in SIP will help to gain benefit from market volatility?
  • Investing through SIP’s will help you to gain benefit from market volatility because when there is a downward trend in the market, you will have the opportunity to grab more units for the same price.

  • What is the meaning of mutual funds?
  • A mutual fund is a company that takes money from various investors and invest the money into different assets like shares, stocks, bonds and more.

  • Which plans generate more returns between direct and regular plans?
  • Direct plans help to give better and larger returns in comparison to standard plans because the expense ratio of the direct plan is less than standard plans.

Final Thoughts

Investing in mutual funds can be rewarding and disappointing, but in the end, you must decide which mutual fund is right to give you higher returns on a long-term basis.
In the end, it’s all about practice and staying disciplined. Once you’ve mastered these two essential factors, mutual funds will surely help you get over all the financial risk by delivering respectable returns every year.