Mutual Funds- Boon for Investors!

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But what should be kept in mind before investing in one!!


Mutual Funds are possibly the best financial planning instrument available in the market. Every individual wishes to invest his money in a convenient & hassle-free manner. He would like an expert to invest on his behalf & give consistent return but at the same time at a low cost. Mutual funds fulfill most of these needs & this is the reason as to why mutual funds are in favor by many people all over the world.

 

In simple terms a Mutual Fund is common pool of money invested by the public collectively and mutually managed by professionals called Fund Managers. It is nothing but a form of collective investment. A Mutual Fund collects savings from small investors and invests them in government and other corporate securities to earn income through interest/dividend as well as have capital growth..Each fund is divided into small fraction called ‘units’of equal value. Each investor is allocated units according to size of his investment & prevalent NAV. The success of a Mutual Fund depends on the efficiency with which it is managed by its professionals. Thus the investor must be careful in selecting a fund. Let’s see what should be kept in mind while choosing a fund to invest in.


Objective of the fund-
The most important aspect is to see whether the fund is income oriented or growth oriented. Income oriented funds are backed mainly by fixed interest yielding securities like debentures and bonds, where as growth oriented are backed by equities. Growth oriented schemes are more risky than income oriented schemes. The investor should compare the particular scheme of one fund with the same scheme of another fund. For long term goals, growth/equity schemes should be invested in while for short term goals, debt/income schemes are ideal.

Consistency of performance-
A mutual fund is always intended to give steady long term returns, and thus the investor should measure of a fund over a period of atleast three years. Inspite of the common disclaimer that ‘past performance is not an indicator of future returns’, consistency in performance is a good indicator of the fund manager’s skill and knowledge.

Historical background-
The success of any fund depends upon the competence of the management, their experience and honesty. A good historical record could be a better horse to bet on than new funds. As it is likely said ‘A known enemy is better than an unknown friend’.

Cost of operation-
Mutual funds seek to do a better job of the investor’s funds at a lower price than the investor himself. Investors must carefully examine the expense ratio of the fund and compare with others. Higher the ratio lower will be the returns. Another important ratio to see is the Portfolio turnover ratio. Higher this ratio, higher the ‘churning’ done by the fund manager. Churning basically means how many times the fund manager is buying & selling shares or changing shares in the portfolio. This increases the expenses of the fund as well as indicates that the fund manager is not sure of his long term stock picks.

Assets under Management
Assets under management or AUM is often a parameter overlooked by many investors. There are cases of funds giving fantastic returns but the AUM of such funds is very small. A fund having an AUM of say Rs 5 crores & giving fantastic returns is most probably a private party of some investors. More than a Mutual fund it may be a Portfolio Management scheme. These funds usually have a few big investors & with even one investor leaving the fund’s NAV will dip. Ideally go for a fund with a sizable AUM as more investors usually means more consistency.

If the above five factors are kept in mind, an investor can definitely reduce his risk & invest in quality funds. The investment should be part of his larger financial picture & should be aimed at achievement of his life goals. Keeping this in mind, investing in Mutual funds will be a breeze!


By Tamanna Mulchandani

The writer is working with FpGuru.com as a para-planner.

Comments  

 
+1 #4 Leena Haseja 2011-06-13 18:00
nice article. gud content with useful information for new investors.

Keep it up excellent work!!!!!
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+4 #3 sonal pahuja 2011-05-17 18:41
nice article,easy to understand.
good job,keep it up..:)
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+5 #2 harsh mulchandani 2011-04-08 18:48
gud content..:):)
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+5 #1 vijay pahuja 2011-04-07 05:39
thanks for the vital information,
the information is very helpful for new investors like me who have already have a bad experience in equity market.

thanks again.
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