Mutual funds in India are financial instruments that aggregate capital from multiple investors to create a diversified portfolio managed by professional fund managers. They are managed by professional fund managers, making them an attractive option for investors seeking diversification and professional expertise.
In India, there are two popular modes of mutual fund investments: Systematic Investment Plan (SIP) and lump sum investment. Investors make one-time investments when they invest through lump sum plans. SIPs, on the other hand, allow them to invest monthly or quarterly, in smaller amounts.
How to choose the best mutual fund investments in India?
You can follow these five tips to choose the best mutual fund investments in India:
1. Analyze the past performance of the mutual fund: You must analyse the fund’s historical returns over different time frames. A mutual fund’s past performance provides valuable insights into the fund’s ability to perform in different market conditions.
2. Conduct a risk assessment of the mutual fund: Different funds carry varying degrees of risk based on their asset allocation and investment objectives. For instance, equity funds are generally riskier than debt funds. You must evaluate risk parameters to understand how the fund has performed and assess its ability to generate risk-adjusted returns.
3. Consider the fund’s expense ratio: The expense ratio represents the annual fee charged by the mutual fund for managing your investment and is expressed as a percentage of the fund’s net assets. Lower expense ratios are preferable, as they leave more money invested, increasing the potential for compounding returns over the long term. You can compare expense ratios across similar funds to identify those with more cost-effective management.
4. Evaluate the fund manager’s track record: The fund manager’s expertise plays a pivotal role in the fund’s performance. Assess the track record of the fund manager, considering their experience, investment strategy, and how well they have managed the fund during different market cycles.
5. Check the fund’s portfolio diversification: You should diversify your investment portfolio to reduce the overall risk of your investment. Analyze the mutual fund’s portfolio holdings to ensure it is well-diversified across various sectors, industries, and asset classes.
Which mode of mutual fund investment should you choose?
A Systematic Investment Plan is a very convenient method to invest in a mutual fund scheme. SIPs allow you to invest with small amounts regularly, making it easier to start investing without the burden of a lump sum. Secondly, they promote discipline and systematic investing. Moreover, they help in rupee cost averaging, where you buy more units when prices are lower and fewer units when prices are higher, potentially reducing the overall average cost of your investment. You can start an SIP investment even with ₹100.
To choose the best mutual fund in India, you must assess the factors mentioned in this article, and also analyse your investment style to select the mode of investment that suits you best – SIP or lump sum. Be sure to analyse the past performance of a mutual fund before investing in it.