At the end of a mutual fund ad everyone must have heard the saying investing in mutual funds is subject to market risk, please read the offer document carefully before investing. This is very true, but, have long term investors benefited from investing in mutual funds, Or is this a gamble?
Let’s take the approach of an investor and try to dig into their mindset.
A long term investor would invest with a horizon of above 5 years to 7 years. Obviously, every investor has different sets of objectives and investment horizons. A short term investor would invest their money for a few months to say up to a year. Anyone with a medium term horizon will invest their money for a time period of 1 to 3 years.
To begin with, it is essential for an investor in an equity mutual fund to have a long term investment horizon. If your investment horizon is for 1-2 years, then mutual funds might not be the best available investment option. An investor may have a long term investment approach for a variety of reasons, to achieve their goals, saving for their children or retirement, to buy a car or a home or even travel internationally. What would they have to maintain to achieve this set goal for themselves? A disciplined mind, irrespective of the volatility in the market, they would not deter from completing their investment term, possibility of increasing their investment in funds that are performing well. Setting achievable goals will help an investor manage his funds and future investments.
Historically, if we see, the longer an investor stays invested in a mutual fund, the investor is better off in terms of achieving desired returns.
Making an investment decision is not always easy as there is underlying risk attached to all the different investment options. It is critical to understand the relationship between return and risk attached to all the available investment opportunities. So doing some homework by oneself would help make a more informed investment decision.
How should we go about picking a mutual fund that suits us as individuals?
1. These are a few parameters that would help you narrow down your investment
2. Which stocks does the particular fund invest in?
3. Is the portfolio structure in sync with the objective of the scheme?
4. What is the churn/turnover ratio in the portfolio?
5. History of the fund manager, how long has he been managing the fund?
6. How much is the total asset under management?
7. What have the historical returns been for the fund – Check the last data of the last 5 to 7 years
8. Look at some ratios like expense ratio, beta, etc. for better clarity of the scheme
9. Picking a fund that suits your risk profile
Of course, this is not an exhaustive list. Above are some fact checking exercises an investor can do before jumping into any mutual fund investment.
Thanks for your patient reading!