When selecting a mutual fund, your financial goals matter. Therefore, first identify your financial goals. Your financial goals can be either short-term, medium-term or long-term.
Mutual funds are a great way to increase your hard-earned money. There are many mutual fund schemes available in the market. To get the best return from your mutual fund investment, it is important to choose the right product. Each mutual fund scheme is set to achieve different financial goals of the investors. In this article, we will consider some things that can help you in choosing the right mutual fund.
Consider your goals before investing
When selecting a mutual fund, your financial goals matter. Therefore, first identify your financial goals. Your financial goals can be either short-term, medium-term or long-term. For example, if you want to raise funds for the down payment of a home loan or for any other long-term financial goals, you can invest in an equity mutual fund. For short-term financial goals, you can choose liquid funds or ultra-short-term funds. For medium-term goals, such as one-to-three-year investment timelines, you can choose short-term debt funds after doing an in-depth assessment of risk. Therefore, consider your financial goals and timeline when choosing a mutual fund. For different goals, different underlying asset classes (such as equity, date, Gold etc.) and by investing in more than one type of mutual fund in products in the same estate class, you can diversify your portfolio. When choosing a mutual fund, also consider time horizon. Horizon is the period for which you want to maintain your investment in a mutual fund.
Assess your risk appetite
When choosing a mutual fund, ask yourself about your ability to bear your risk. Identifying your ability to take risks will help you streamline your choice. Because there are different types of funds according to different types of needs, and all of them involve low to high risk. For example, liquid funds have less risk associated with them. Risks and returns are directly proportional to each other. Therefore, low risk means low returns, and vice versa.
Mutual fund performance
You can assess the selected mutual fund based on its past performance. Mutual funds are rated by various rating agencies like CRISIL, ICRA etc., to make this task easier for you. You should always choose the top rated mutual fund. But, apart from rating, also check other important factors like reputations of fund houses, underlying assets, expense ratio etc. Also, keep in mind that past performance is not a guarantee for future returns.
Expense ratio
The expense ratio is the amount that various costs incurred by the fund house to manage any mutual fund scheme are charged to the investors. This is usually a percentage of the return. Therefore, when choosing a fund, it is better for you to choose the variant that charges the least expense, so that you can make the most of the investment gains.
Tax application
Investment returns should always be calculated in terms of tax liability. The tax rate depends on the category of the mutual fund and the period of investment. For example, an investment in an equity mutual fund for more than one year is considered long-term. Equity mutual funds are taxed at the rate of 15% on short-term capital gains (STCG). For long-term capital gains (LTCG), a rebate of Rs 1 lakh is given in a single financial year and a tax of 10% is levied for returns exceeding Rs 1 lakh. For debt funds, the tax rate for STCG is levied at the slab rate applicable to the investor and LTCG is taxed at 20% with indexation benefit.
The conclusion
The key to successful investment in mutual funds is to undertake optimal diversification and staggered investment so that the risk associated with the investment can be effectively managed and desired returns can be obtained. Do not invest in a single asset class because its performance is good. You should diversify your investment so that it can help you achieve your short-term to long-term financial goals.
