Basic Questions To Ask Before Investing In A Mutual Fund
Financial freedom is a status everyone desires, but only a few achieve it. To achieve this goal, you may stick to the traditional 9–5 job or start your own business. However, another way to achieve financial freedom is through investing. The latter usually involves a lot of risks and is very time-consuming.
Fortunately for you, mutual fund investing is a thing. They pool money from investors to purchase bonds, stocks, and other securities, and the profits or losses are shared among the investors.
This article will answer some basic questions you need to ask before investing in a mutual fund.
Before selecting a mutual fund, there are some questions you should ask:
- What is your goal?
Before getting into the risky world of investing, it is crucial to specify and assess your goals. Your risk preference, time frame, and investment objectives should be laid out. Your investment objectives will then dictate which mutual funds to consider.
This strategy is mostly geared towards more conservative investors who prefer low-risk investing and seek stability in their portfolios. It ensures that the capital you invest stays safe but delivers comparatively lower returns. If this strategy suits you, you should consider equity funds as your mutual fund investment.
This strategy involves slightly more risk than the long-term strategy. The main idea of this strategy is to create an income stream through dividends received from mutual fund investments. If this rings true for you, you should consider investing in dividend stock funds.
The riskiest of all the strategies, this entails investing in high- or very high-risk mutual funds in pursuit of high returns in a short amount of time. This appeals mostly to younger, risk-tolerant investors. If you aim to yield high returns, investing in liquid or small-cap funds would be the optimum strategy.
- How well has the mutual fund performed in the past?
The past isn’t necessarily indicative of what the future has to hold. However, when it comes to mutual fund investment, in-depth research of how it has performed in the past is a must before any consideration of investing.
Going through the annual returns would give you a better insight into how the mutual fund is affected and managed during both bull and bear markets. By doing this, you can rule out the odd cases and get a general idea of what to expect from the mutual fund, which makes it easier to decide whether or not to invest.
- Who is running the fund?
The individual spearheading a mutual fund is a portfolio manager. The success of that specific fund is heavily dependent on how it allocates the pooled capital of investors. The way they manage the funds in unfavourable market conditions is of utmost importance and is considered one of the most important skills a portfolio manager should possess.
Hence, before proceeding with any kind of mutual fund investment, in-depth research of the portfolio manager needs to be done. His track record should be scrutinized, and inconsistencies should be considered a red flag. A vastly experienced portfolio manager is usually safer than one with high, inconsistent returns.
- What are the expenses involved with a mutual fund investment?
Apart from your invested capital, several expenses should be taken into consideration before investing in a mutual fund. All of these fees are explicitly disclosed by a mutual fund to offer full transparency to investors. There are two types of fees that investors need to bear when investing in a mutual fund.
- Shareholder Fees
This fee is paid directly by the investor and is mostly tied to actions taken by the investor regarding their mutual fund investment. It involves the following:
- Purchase fee
- Account fee
- Exchange fee
- Redemption fee
- Sales load (similar to a brokerage commission)
- Annual Fund Operating Expenses
These charges are paid out of the fund assets and are indirectly paid by investors. They consist of the following:
- Management fees
- Distribution fees
- Total annual fund operating expenses
- Other expenses (legal and accounting expenses)
- What are the tax implications of mutual fund investment?
Like any other source of income, taxes play an important role and will cut off a share of your profits. In the case of investing in a mutual fund, taxes depend on the type of investment as well as its duration:
- DividendsDividends received from mutual funds are tax-exempt. However, a DDT of 29.12% is still applicable to the mutual fund during the distribution. If you have opted for equity funds, DDT drops to 11.65%.
- Capital Gains Tax (Short-Term)In terms of capital gained over a short period while investing in a mutual fund, usually less than 12 months, a fixed tax of 15% is applied if you have opted for equity funds. In the case of investing in other types of mutual funds, tax on capital gains is determined by the investor’s tax slab.
- Capital Gains Tax (Long-Term)Mutual funds that allow investments made under Equity Linked Savings Schemes (ELLS) exempt investors of 1.5 lakhs in tax. However, ELLS needs you to lock in your investment for 3 years. On the other hand, investing without ELLS, according to Long Term Capital Gain (LTCG) you will be exempted from 1 lakh. But if it exceeds the aforementioned amount, there is a 10% tax without indentation.
Choosing the best mutual fund investment that aligns with your needs and beliefs is a lengthy process that must be done to ensure maximum benefits from the capital invested. But, if done correctly, it can provide a good source of income for the investor.
Just like any other investment, a mutual fund investment is subject to risks. That is why financial advisors like Piramal Finance are in high demand. They simplify the process of investing in mutual funds while equally providing myriad other financial help and advice.
Also Read: A comparison of saving accounts and bank FD
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