One of the more popular investment choices today is mutual funds. In these investment options, multiple investors bring their money to create a pool of funds. The funds are then used by an Asset Management Company for investment in various financial instruments such as equity, debt, money market and securities. The profits from the investments are then distributed among the investors according to their original contributions to the pool, with the AMC taking a cut.
That is the basic knowledge that most have about mutual funds. However, most people have little idea as to how they can start investing in them. Remember, to invest in mutual funds, you must first have a thorough understanding of its terminology, fees and other details. Here are the other details you must know to invest in mutual funds.
Understanding Asset Allocation
Before investing, you must understand the types of portfolios available. In other words, you need to know where you want your assets to be allocated. The best asset allocation involves investing in various funds that provide coverage on the asset classes, aligned with your future requirements, and are a reflection of your risk profile. Ideally, asset allocation should include a healthy mix of low risk and high risk instruments.
A rule of thumb would to follow your age when allocating to low risk instruments. For example, a 25-year old person should have 25% asset allocation in low risk debt instruments. This provides a comfortable buffer against potential downturns in the rest of the asset. Younger people can withstand higher risk better than older investors as there is less worries about potential losses.
Discovering the Fund Types
It is vital that you compare the various mutual funds in the market. Take into account their investment philosophy and past performance. For this, you must know what your financial goals are. If you need more money, the risk profile has to be higher.
Consider the time limit for the returns as well. Some mutual funds tend to be close-ended while others are open-ended. Close-ended funds cannot be liquidated before the maturity of the fund. As a result, you must be comfortable with the time frame of the fund.
Then there is the risk profile. You must assess your risk profile. If you are comfortable with the fluctuations of the stock market, you will have a higher risk profile. If you want a safe investment, you have a low risk profile.
Compare the Funds
After shortlisting the mutual funds based on the above points, you can start comparing them. Start by checking the past performance of the mutual funds. Check the top five funds in the asset class that suits your time frame, risk profile and financial goals. Compare the performance based on different time periods. Mutual funds that have a place in all of these lists are the ones to consider.
Now, you are ready to make an investment. Remember that you should keep following up on the investments even if you have a manager to do so. Of course, you can always hire a financial advisor to help you monitor the funds and provide you with regular updates. The advisor might also help you find the right mutual funds.