Are you confused about how to select the best mutual fund? Here is the solution to your dilemma!
Each investor is unique in his/her investment decisions. They may be driven by various choices and motives to choose a particular mutual fund to invest in. While selecting the best mutual fund plan it is necessary to align one’s financial position, risk appetite, financial goals and objectives. Let us have a look at some of the factors which will help you in selecting the winning mutual fund.
1. Different Mutual Funds can serve different objectives. On the other hand, an investor who is saving to buy the property or a car would like to invest in a medium-term scheme (3 to 5 years). So identify the financial goal or objective you wish to achieve.
2. Identify and analyse the level of risk you can tolerate because investment in mutual funds is subjected to market risk.
3. Another important factor to be considered while selecting a mutual fund is the performance of its fund manager and how long he/she has been at its helm. For this, the experience of a fund manager should be carefully analysed along with the funds that are currently managed by him and the funds managed by him in the past.
4. As an investor you must select a mutual fund that has zero or minimal entry and exit load.
5. Always try your best to avoid middlemen charges and go for direct fund options.
6. You must target mutual funds that have a lower expense ratio as the percentage may seem quite small but when it will be calculated across your total investment portfolio, it will have a deep impact.
7. Evaluate the potential of funds. The potential of the fund is determined by its consistency maintained in previous years and how the fund has managed to be on the top by providing reasonable returns.
Money required for investment in a mutual fund
Most people are not aware of the minimum amount of money required for investment in a mutual fund they often think that they need big figures to start with and refrain themselves from investing which is not true. The amount of money to be invested depends on the type of mutual funds scheme that an investor takes. The minimum investment value in most of the mutual fund scheme ranges between Rs. 500 to Rs. 5000. However, in a bid to attract investors who are looking to invest lower amounts, some domestic mutual funds even allow a minimum investment of Rs. 100.
Types of Mutual Funds
> Open-ended funds
In an open-ended mutual fund, an investor can invest or enter and redeem or exit at any point in time. Open ended mutual funds do not have a fixed maturity period and they are available for subscription and repurchase on a continuous basis.
> Close-ended funds
Close-ended mutual funds have a fixed maturity date; the maturity period typically ranges between 3-7 years. This type of mutual fund is for the investors looking for long term investment. Closed ended funds offer higher returns in comparison to open ended funds. The units in the close ended mutual funds are sold at a price based on the Net Asset Value of the mutual fund.
What type of return do you earn in Mutual Funds?
Mutual funds offer investors returns in two forms; dividends and capital gains. Dividends are profits shared by companies when they are growing. They are a token of rewards against the holdings of the shareholders in equity of the company. Dividends are in proportion to the number of shares held by the shareholder. When any asset is sold more than its value then the increased value of that capital asset is known as capital gain. Capital gain are of two types:
- Short term capital gain.
- Long term capital gain.
Tax Implications in Mutual Funds
In the case of mutual funds returns depend on market conditions and mostly depend on the performance of the underlying assets.
Taxation on Dividends
Earlier earnings in the form of dividends were not taxable at all in the hands of investors; only the companies were required to pay dividend distribution tax (DDT) before distributing their profits to the investors. But after amendments, dividends received from domestic companies exceeding Rs.10 lakh shall be taxable at the rate of 10% in the hands of the investors.
Taxation on Capital Gains
The rate of taxation on capital gains is hugely based upon the holding period of funds and the type of mutual fund scheme chosen by the investor.
Things you should remember while investing in mutual funds
- Never make sentimental investment decisions
- Always diversify your investment portfolio
- Never invest with insufficient knowledge
- Never hold consistently loss-making investments