5 Things You Must See Before Investing In A Mutual Fund

Your Risk Profile

Investors must ascertain their own risk profile. As there are funds that cater to various risk profiles in the market, ranging from very risky to very conservative, its important that investors choose the fund that best suits his/her risk profile. For instance, it doesn’t make sense for a risk-taking investor to invest in debt funds because he would not be satisfied by the kind of conservative returns debt funds give. Similarly, a conservative investor should stay away from equity funds, as they are not suited to stomach the accompanying volatility.

Your Investment Horizon

The amount of time investors are willing to stay invested in the fund also determines the kind of fund suited for him. Equity funds are best suited for investors who have a longer time horizon as equities give the best return amongst all other asset classes over the long term. But for investors who want to invest for a shorter tenure, debt funds are the best options.

Offer Document

It’s just as important to know your fund, as it is to know yourself. The best source of information on a fund is its offer document. It has information on the nature of the scheme, the kind of instruments the fund aims to invest in, its risk-profile, its investment strategies, and so on. It also gives you an idea of how other schemes from the same fund house have performed. It helps to check the potential of the fund and also the track record of the fund house.

How good are its Disclosures?

A mutual fund may promise you high returns and superior service, but how good are its disclosure levels? Check if your fund house discloses its portfolios regularly. Although Sebi rules require fund houses to disclose their portfolios only twice a year, many new-age funds send portfolios and newsletter to their investors on a quarterly basis. Fund houses send you quarterly newsletters by post or display their monthly portfolios on their websites or do both. It helps if your fund regularly discloses such details as it tells you exactly where your money is invested.

Past Performance

If the fund is an existing one, check its past performance. Though past performance is no guarantee of future returns, but it does give you an indication of how well a fund has capitalised on upturns and weathered downturns. The fund’s record also gives an indication of the volatility of its returns. Investors should invest in schemes that deliver high returns with low volatility. Then again, see how well your fund house has performed in the particular class you are planning to invest in. This is especially the case if an investor is putting money in new launches where past performance is absent.