One of the reasons why people consider keeping aside a portion of their income for the purpose of investment is that it helps in acquiring long-term wealth. The long-term wealth is generally used for everyday expenditures after retirement. One of the investment schemes that you can consider signing up for to generate long-term wealth is a mutual fund scheme. Introduced in India in the early-1960s, mutual fund schemes have gone on to become one of the prominent investment schemes in India.
Despite their popularity, people still have a lot of misconceptions about mutual funds investment. Despite gaining popularity in recent times, investors are still unaware of how to analyse mutual fund schemes. Whether you are investing for the purpose of capital preservation or wealth creation, opting for the right type of mutual fund scheme is absolutely crucial for achieving your investment objective.
So, another question after “what are mutual funds?” is “how to sign-up for a mutual fund scheme?” The answer to said question is to check certain parameters. Listed below are some of those parameters:
- Check whether it is a regular plan or a direct plan:
Before you start analysing a mutual fund scheme, it is important to check whether the mutual fund offered can be purchased through a regular plan or a direct plan. A regular plan means that you are required to pay commissions to brokers or distributors. If you signed for your mutual fund scheme through a regular plan it is important to remember that you will be enjoying lower returns against your investments because you are required to pay commissions for your financial planning. Over time, as your investment cost increases, the return on the investment decreases. Direct plans are the opposite of regular plans. A mutual fund scheme that’s directly purchased from an asset management company (AMC) is referred to as a direct plan. Unlike regular plans, professionals like brokers, agents, or other intermediaries play no role in direct plans.
- Look up the assets under management (AUM):
AUM serves as an indication of the market value of all the investments that a mutual fund holds on its clients’ behalf. While analysing a debt fund, a high AUM is usually considered a good sign. A high AUM indicates that the fund comes with a better investment inflow. Also, if there ever comes a time when you are thinking of withdrawing your money, a high AUM doesn’t put redemption pressure on the fund thanks to its larger size. Conversely, when it comes to an equity mutual fund, especially in the cases of a mid-cap or small-cap mutual fund, a smaller AUM is preferred. At the same time, it is also important to remember that you shouldn’t continuously target equity mutual funds with the lowest AUMs because they might come with higher operational costs per unit. An ideal strategy is to sign up for funds that have an average AUM. Such funds can come with economies of scale, that too without losing out on investment opportunities.
- Look up the fund manager’s records:
Another important parameter to check before signing up for a mutual fund investment or scheme is the record of the fund manager. Make sure that the fund manager has adequate experience and a good track record. It is better to select a fund manager who has years of experience in the field. Also, please check the performance of the funds they have managed or even co-managed. It is necessary that you should entrust your mutual fund scheme to someone who both understands how the market works and can also help you to earn a higher return on your investment.
Apart from the three above, there are several other parameters of mutual funds that you should check. In case you are having doubts, please get in touch with an investment advisor who is registered with SEBI.