Mutual funds have a taken a special place in the lives of most investors due to the several mutual funds benefits enjoyed by investors. Some of the benefits include diversification of portfolio, professional management, ease of investing, well regulated by the securities and commodities’ regulator of India – SEBI (Securities and Exchange Board of India), potential to earn high returns on mutual fund investments, tax benefits, etc. However, one must consider that not all types of mutual funds are ideal for all investors. There are different types of mutual funds available to investors meant to cater varying needs of investors. In this article, we will explore 5 factors you must check before choosing a mutual fund for your investment portfolio:

  1. Investment goal
    It refers to the investment objectives of the investors that they wish to achieve through their mutual fund investments. These financial goals could be anything short-term, mid-term or long-term. Examples include buying the latest smartphone, purchasing a new car or house, saving for your child’s marriage or higher education, funding your retirement, etc.
  2. Time duration
    It refers to the duration for which an investor wishes to stay invested in their mutual funds to achieve their financial objective. It can be either as short as a few hours or a few days to as long as 10 years or more. Different time horizons of different investors require varying mutual fund categories. Generally, debt funds are ideal for short duration and equity investments are ideal for long-term investments of seven years and plus.
  3. Risk appetite
    Risk appetite or a risk profile of an investor refers to the level of risk an investor is willing to take in order to have a higher potential of earning higher returns on their mutual fund investments. Generally, there are three main categories of risk profile of an investor – conservative or risk-averse investors, aggressive investors, and moderate investors.
  4. Expense ratio
    Expense ratio refers to the total cost incurred against managing and operating an investor’s fund. Basically, the fund manager charges a small fee known as expense ratio or total expense ratio (TER) for the professional management it offers to its investors. These costs include several expenses and management fees such as trading fees, operational expenses, legal fees, auditor fees, research fees, etc.
  5. Tax aspects
    It is essential that all investors, especially novice investors must consider the tax aspects of the mutual fund schemes they choose to invest in. Both equity funds and debt funds are taxed based on the holding period of the mutual fund investment. As compared to other types of investments, mutual fund investments are believed to comparatively efficient in terms of post-tax returns.

Beginning with your investment journey might seem like a complicated task to novice investors. But once you have built a solid financial plan for yourself, the rest of the journey seems like a cakewalk. Always make it a habit to ensure that your mutual fund investments are aligned with the objectives of your financial portfolio. Lastly, you can always take the help of a financial expert such as financial advisor to help you with your investment decisions. Happy investing!