Step 1- Purpose

Why did you decide to invest in mutual funds? Is there a clear-cut reason? The purpose could be as simple as making more money for something serious like purchasing property, Children’s education, tax savings, dream vacation, or retirement. Whatever it is, have a purpose and a goal to achieve.

Step 2- Time Horizon

When do you want the investment tenure to end? Are you looking for short-term gains or long-term investments? A long term investment lets you take more risks but you have to play it safe if the case is short-term. 

Step 3- Risk tolerance

HOW much risk are you willing to take on for desired returns? Are you willing to risk it all or play it safe? Understand your risk tolerance and choose an ideal fund that aligns with your comfort level. SEBI has categorized Mutual fund risks into 5 categories being-  low risk, moderately low risk, moderate risk, moderately high risk, and high risk. 

STEP 4- Liquidity

HOW liquid or easily convertible to cash do you want your investment to be? Mutual funds have a redemption process. If you want to be able to get cash hands-on very quickly, you should go for open-ended mutual funds. However, if that’s not the case, then you should go for close-ended mutual funds.

Step 5- Investment portfolio

WHERE are your funds being invested? It is important to check the portfolio of the mutual fund of your choice to understand the risk and returns associated with investing in each specific asset. These are the most common types of funds based on investment portfolios- 

• Equity Funds (Stocks): Invest in company shares. Large-cap funds target well-established companies, while small-cap funds focus on smaller, high-growth businesses.

• Debt Funds (Bonds): Invest in bonds for steady income, including government and corporate bond funds.

• Money Market Funds (Short-term securities): Invest in low-risk, short-term securities like Treasury bills and commercial paper.

• Hybrid Funds (Mix of assets): Combine stocks and bonds for growth and stability, such as balanced funds.

We are halfway there. Let’s keep going!

Step 6- Fund Performance

When you have a clear idea for all the above questions, you should have shortlisted mutual funds that align with your outlook. Now it is time to take these funds and compare their performance. Performance is basically how good and consistent the return turns are despite the risk taken. Compare the performance of the fund to benchmarks and standards over a long period, preferably. You can also compare funds amongst each other. Keep in mind that past performance does not always reflect on the prospects. 

Step 7- Background Research

What do you know about the fund’s management team? Once you finalize the most optimal fund for yourself, it is crucial to explore the fund’s manager(s), experience, investment strategy, and expertise. Keep in mind that it is beneficial to be up to date on the changes that have taken place in the fund’s management team, investment strategies and goals. 

Step 8- Expense ratio and exit load

HOW much commission does your mutual fund company charge, to handle the fund? Generally, the expense ratio is expressed in terms of a percentage of total Assets Under Management (AUM) and is charged annually. A higher expense ratio will eat up the returns on investment. A lower expense ratio is therefore preferable, but keep in mind this trade-off- that seasoned companies or teams that manage a mutual fund professionally and with expertise often charge a higher expense ratio. 

Exit load is the fee you are charged, by MF companies, when you redeem your mutual fund units. It is done to discourage investors from redeeming their funds quickly and to safeguard the interests of other investors in the fund. Check both the expense ratio as well as the exit load of the Mutual fund.

Step 9- Investment

This is the last step. Once you have clarity on all your investment styles and find a fund that appeals to you, you can choose to either invest a lump sum or go for a SIP- Systematic Investment Plan which will be auto-debited from your bank account every month.

Step 10- All set to invest!

It's time to invest and watch your fund skyrocket. Good luck out there!

CONCLUSION

With that, we have come to the end of this article. Go choose a mutual fund now!!!

And as always,

Happy Investing!!!