You surely have heard the phrase, “Mutual fund investments are subject to market risks, please read the offer document carefully before investing” after every mutual fund advertisement, and this is for a good reason this disclaimer. Mutual funds do have risks involved, but it does not mean that you should not invest in a mutual fund. Choosing the right mutual fund can help you earn substantial profits.
Here are some factors to be taken into consideration before investing in a mutual fund.
Your Investment style and objective
Every investor invests in a mutual fund to earn substantial profits and not incur losses. However, you need to take into consideration your risk-taking appetite before choosing a mutual fund to invest your money. For instance, if you have a low-risk desire and are satisfied with lower returns without taking many risks, in that case, you should opt for a debt fund. Whereas, if you have a higher risk-taking appetite, you can choose to invest in mutual funds that invest inequities. It is essential to select a mutual fund whose objectives and financial goals are in alignment with yours.
Past Performance of the Mutual Fund
Before you invest in a mutual fund, an investor must examine the fund’s past performance in terms of NAV growth, which is an indicator of the fund’s performance over the past few years. While past performance cannot guarantee future returns, it does indicate that the fund is managed by experienced and knowledgeable fund managers who have the potential of growing the fund in the coming future.
Expense Ratio
Not every rupee you invest in a mutual fund goes into investing, and every mutual fund has an expense ratio that is utilized to covert the expense such as salaries, overheads and other costs involved in managing the fund. A high expense ratio means that a lesser portion of your investment is being invested in the financial markets, which can directly affect your future returns. With this, it is essential to check and compare the expense ratio of different mutual funds before making your investment decision.
Exit Load
Exit load is another direct cost an investor needs to incur. Exit load is a small percentage of your NAV; thus, a high exit load can leave a substantial dent in your investment value. Exit load comes into action when you plan to sell your units; as a result of this, a higher exit load will erode a portion of your investment. However, it is recommended to stay invested in mutual funds for an extended period of time to ensure healthy returns from any mutual fund.
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