April 20, 2024
Mutual Funds Investment Guide

Mutual Funds Investment Guide

Things to be considered before investing in Mutual Funds

Mutual Funds, despite being one of the highest risk-bearing investment instruments, is the most preferred option of investors for long-terms in India during recent years. If chosen wisely, some of the mutual funds have given astronomical returns over the years. However, choosing the best suitable mutual fund scheme is a cumbersome task due to the availability of numerous numbers of schemes in the flotation. Further, you need to first ask various questions from yourself before going ahead with investing namely:

Understand your profile (Asset Allocation)

The first question to ask yourself is what is your risk-appetite? How much you are willing to take the risk and this purely depends on your income level and your age. If you are having a well-paid job and ageing in 30’s only then your risk-appetite is much high and you could be termed as an aggressive investor.

You can allocate most of your funds into equity portion either equity-oriented mutual funds or direct equity market. The proportion of debt portion and equity portion changes with the age and you should always revise your asset allocation based on your age.

Read Mistakes while Calculating Retirement Fund

Assess your Financial Goals

You need to assess that for what purpose you are saving and investing because if the investment is not goal oriented then you cannot ascertain that the scheme you have chosen is performing as per your requirement or not. The goals could be buying a home, buying a car, child education, child marriage or retirement. Your every investment should be linked with certain goals and you need to regularly assess and re-balance if any deviation is noted.

SIP or Lump-Sum

The next question to answer is whether you are going to invest regularly or one-time. This is based on your income level. However, it is said that you should invest in lump-sum in a rising market and in SIP in a falling market, but this is total rubbish because one cannot time the market. Since SIP works on the averaging of cost, so it cut down the risk of losses but it also trims your chances of gaining.

Direct or Regular Funds

With the wider use of the internet, various companies have tapped this opportunity and have started direct plans where you can decide the mutual fund scheme to invest by yourself and since no agent is involved in this, you will get 1% per cent higher returns as compared to regular plans where the agent fee/brokerage in deducted from the returns. However, choosing the mutual fund scheme is pretty tough if you are not familiar with the points listed out below. So it is advisable to consult a fee-based financial planner to start investing in the right direction.

Time Horizon

Last but important question is the time period you are planning to stay invested. The determination of goal is based on the time to achieve. Suppose your goal is to buy a car but you need to decide the time horizon that is in how many years you are planning to buy, after two years or three years or more, but the time should be defined.

Mutual Funds Investment Guide

Upon answering the above questions the next step is selecting mutual funds. This requires knowledge of various things such as Asset Management Company, Asset under Management etc. Below is the list of the things to be considered before investing in Mutual Funds


The mutual fund scheme you have chosen should not be new and must be floated for a decent period of time. It is because believing in the new fund is far more risky in comparison to the fund already in existence. Further, there is no track record to be reviewed as the newly established scheme. So it is always better to go with the fund which is in existence at least from the past 10 years.

Fund Manager

A cross-check over the fund-manager will give you an assurance that you have handed over your hard-earned money in the right hands. It is like sailing the boat with the experienced sailor. Few things to check here are the returns he had provided in the past with the other AMCs or other mutual fund schemes. A fund manager with expertise in finance and working with the same AMC for a longer period with ethical history will be an ideal manager to go with.

Asset Management Company (AMC) and Asset under Management (AUM)

The chosen Asset Management Company should be well-known and in existence for decent times. Also, the size of Asset under Management (AUM) should be more than one thousand crores. Higher AUM shows that a large number of investors has trust in this scheme and boosts the trust of the investor.

Riskometer (Ratios)

There are various ratios which one can learn to know the risk associated with the mutual fund scheme. Most popular ratios are as follow

Standard Deviation: It means the volatility of funds in comparison to its average returns.
Sharpe Ratio: It refers to the average returns of funds in excess of the risk-free rate of returns. Higher Sharpe Ratio denotes the better fund.
Alpha: Difference between the fund’s return from its benchmark. Higher alpha means better fund.
Beta: Measures the volatility of the fund when compared to the capital market.
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Historical Returns

Most people consider past returns as the best factor to choose the mutual fund scheme. Even if you visit various online portals, all have only one metric to show i.e. 1 year, 3 years and 5 years returns. However, past returns do not assure future returns. You may consider the past returns but this should not be the sole deciding factor of the mutual fund scheme.

It is better to look for consistency returns rather than high return such as Franklin India Prima Fund which has given annual returns of 19.55% over the past 25 years.

Type of Scheme

Mainly there are three types of the scheme based on the market capitalization of the companies in which the fund invests not the size of the mutual fund. These are Large Cap, Mid Cap and Small Cap funds.

As the name suggests, large-cap funds majorly invest in blue-chip companies which provide better capital appreciation over the long period as well as better security. Mid-cap funds invest in mid-size companies which are aggressively seeking funds for expansion and finally, small-cap funds which invest in small market cap companies which possess higher growth potential with the higher risk.


Investors should know the asset allocation of the scheme he has selected. Like where the money is invested i.e. in equity class or in debt class. And also the proportion of the allocation should match with the investment objective of the investor. Higher the proportion of equity better the returns but higher the risk and higher the debt portion better the assurance of risk but lower returns as compared to equity-oriented funds.

Taxation Effect

Before the Union Budget 2018, long term equity funds where holding period exceeds 12 months were tax-free but union budget has changed the full scenario, now LTCG on equity oriented funds is taxed at the rate of 10% over and above the threshold limit of ₹ 1 lakh.

For short term capital gains, 15% tax would be levied if units are redeemed before 12 months.

As for debt funds, Long term debt funds where the holding period exceeds 36 months are taxed at the rate of 20% after indexation. However, STCG on debt funds are simply added to the income of the investor and taxed as per the applicable tax-slab.

Expense Ratio and Exit Load

If units are redeemed before 1 year, AMC charges a certain amount termed as exit load at the time of early exit from the scheme which usually lies between 1% to 1.50%. This exit load gets deducted from the sale proceed of units. Previously, entry load was levied at the time of investing in the scheme but the same has been abolished.

In addition to the exit load, AMC charges annual expenses which are termed as expense ratio which is basically cost of managing your funds. Expense ratio is expressed as a percentage and usually lies between 0.75% to 1.25% p.a.


Few rating agencies are trustworthy such as CRISIL, Valueresearch and Morningstar. The investor must calculate the average ratings from all three before finalizing the mutual fund scheme.

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