Steps to Follow Before Investing in Mutual Fund Scheme

Published On: 15-Mar-2021

Investing in Mutual Fund Scheme is steadily gaining favour amongst retail investors, for they can have a broad spectrum of mutual fund schemes to choose from. However, choosing the right mutual fund scheme is often challenging for the investors since the investment strategy is relative for different investors, and there is no 'one size fits all' strategy. As such, the investors must choose their mutual fund schemes wisely by undertaking the following steps and then make their mutual fund investments

Risk profile

Amongst the broad universe of mutual fund schemes, the first criteria must be to select the schemes for the desired asset class. Different asset classes tend to have different risk profiles, which may be suitable for different types of investors. For example, equities are considered preferred for aggressive investors, while debt may be suitable for conservative investors. Conservative investors may be comfortable investing in large-cap funds, while there might be relatively riskier debt schemes suitable for aggressive investors.

The graphical riskometer, as mandated to be disclosed by SEBI, may help the investors determine the risk grade of a specific mutual fund scheme. The investors should choose the mutual fund scheme that best suits their risk appetite. Investors should always monitor Riskometer as Riskometer is dynamic in nature and its reviewed every month.

Review the investment objective

Investment objective refers to an investor’s financial goal which he/she aims to accomplish with the mutual fund investment. Further, one must also determine the time horizon in which the financial goals have to be achieved. Based on one’s financial goals, investors can screen mutual fund schemes by reviewing different mutual fund schemes investment objectives and asset allocation.

Alignment with the investment horizon

Investors must also select the mutual fund schemes aligned with their investment horizon. This is because different schemes tend to be better suited for different periods. For example, equities equip investors with the potential for long-term wealth creation. However, investment performance is not linear, and there may be short-

term movements in the markets. As such, equities may be suitable for long term investing plans.

Similarly, it is advisable to maintain an emergency fund corpus in liquid funds or overnight funds. Such funds allow better liquidity for the invested amount and are relatively insulated from the credit risk and interest rate risk due to the short-term investing approach. When it comes to investing for financial goals, the investors must choose suitable mutual fund schemes to have a pleasant investment experience. 

Fund Performance

While the above three points were the broader principles to select the specific fund category and fund type, reviewing the fund performance is aimed to zero-down on the particular mutual fund scheme to invest. The mutual funds transparently disclose the schemes’ performance, and the comparative performance against the specific fund benchmark index is also provided as mandated by SEBI. 

However, it becomes crucial for the investors not to get carried away from the mutual fund scheme's short-term performance and instead make an investment decision based on the fund's long-term investment performance across the market cycles

While the past performance is not a guarantee of future returns for the investors, reviewing the performance across market cycles helps investors judge the efficacy of the fund managers' investment strategy and investment approach. 

In case, one is reviewing passive funds, the investment performance will closely replicate the returns of benchmark indices. One needs to compare such funds based on quantitative parameters like expense ratios, tracking errors, etc. The investors must choose passive funds with lower tracking error and expense ratios.

Selecting the right mutual fund scheme is crucial for the investors, as it forms the foundation for the journey towards achieving short and long term financial goals


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