Millennials are lauded for having bigger aspirations, a higher proclivity to trying new things, and adapting to technology quickly. This translates into the sphere of personal finance too. The recently conducted Aspiration Index Survey said in its report, “Indian millennials consider wealth to be their highest priority.” The report also mentions that millennials put away one-third of their money into investments, which are spread across the spectrum from FDs to mutual funds.
Though mutual funds are a popular choice today, investing in them can be complex. After all, you need to consider the volatility of the market, the cost of making an investment, and forecast whether or not the returns are able to satisfy your goals. Understanding how to choose the right mutual funds can help you achieve this smartly and put most of your worries to rest. Here’s all you need to consider.
Ascertain Your Risk Appetite
Not all mutual funds are created equal. By measuring your risk appetite, you can narrow down on your choices. While there are many types of funds, in general, equity funds involve higher risks, debt funds involve moderate risk, and liquid funds involve low risk. Risk is also tied to returns. S, if you take on lower risk, you stand to earn proportionally lower and vice versa.
Take Stock Of Your Goals
Each type of mutual fund has an ideal corresponding investment horizon, so choose carefully to ensure that you earn optimal returns. For instance, you can save for the down payment of your home by investing in equity for a period of around 10 years. Investing in equity for the short-term exposes you to higher risk. So, keep your financial goals and their timelines in mind while choosing mutual funds. Additionally, you can diversify your portfolio by investing in more than one type of mutual fund.
Check The Fund’s Performance
Gauge a mutual fund by reviewing its performance over the past few years. While you may be tempted to check the past returns, this doesn’t guarantee future earnings. Instead, compare various schemes based on their rankings. This ranking is based on complicated statistical methodologies, but its key takeaway is helpful: Your best course of action would be to select the scheme that has consistently been in the top rankings over past few years. This means that its performance has been consistently positive.
Make Sure Your Fund Manager Is A Star Performer
Mutual funds are managed by professionals who invest your money in the right avenues, buy units, and sell them, at the appropriate time. Thus, a fund manager’s expertise has a great influence on what you stand to earn. You would do a lot better if you study fund managers, their previous records and the performance of other schemes managed by them.
Cue Into The Cost of Investment: The Fund’s TER
The money that you invest in mutual funds is not wholly allotted for investment purposes. As much as 2% or more of the amount is consumed by the operational expenses of a fund related to distribution, management and promotion. This affects your returns. Therefore, it is paramount to be aware of the Total Expense Ratio (TER) of a scheme before investing in it. Keep in mind that recently, SEBI capped the TER for various mutual funds to help investors earn more. Some schemes may have higher expense ratios and still perform better, while the opposite is also true. However, the best performing mutual fund schemes yield good returns while still charging competitively.
Rather than doing what your friends or parents are doing, take a more personal approach to choosing mutual funds, keeping these guidelines in mind.
The writer is CEO, BankBazaar.
BankBazaar.com is a leading online marketplace in India that helps consumers compare and apply for credit card, personal loan, home loan, car loan, and insurance.