Important factors to be considered while investing in a Mutual Fund

Investment in share market through Mutual fund route is a safe bet. In the long run it has been proved historically that returns in Index mutual funds are no less than returns in investment made directly in equity. However there are some important factors which should be definitely considered while investing in a mutual fund-

1. Investment through SIP for a long term- Investment in mutual fund should be done through a systematic investment plan which ideally can be monthly on a fixed date. Obviously this is suggested to average out the market risk of investing a lumpsum amount at some price which may prove higher. Even if someone has got some lumpsum surplus fund to invest, he should divide the same into some 6 to 9 parts and should invest the same in 6-9 SIPs. This will reduce the risk of uncertainty of the market.

2. Analyze the NAV ( Net Assets Value)- The investor should make some analyses of the NAV of that particular Mutual Fund. For this he should go through the historical return data and watch the consistency in the return. A good mutual fund would have better return with much consistency compared to average fund. However he should mind it that higher price of NAV doesn’t mean it’s a costly fund and hence instead one should invest in fund having lower priced NAV. Lower price of NAV doesn’t mean that its an attractive fund for investment. Rather as stated above consistent higher return is the key factor to be considered in investment.

3. No. of funds – In the market there are large no. of Mutual Funds floated by different fund houses. However, an investor should select 3 to 4 funds only for better monitoring and diversification of the investment. More than this has not much benefit as the different funds of a particular category eventually invest in largely the common companies only. Therefore, there will not be much difference in return and risk of different funds. But selecting funds of different categories is important. 

As we know the mutual funds can be categorized into 3 types on the basis of size of capital of companies in the share market- Large cap mutual funds, Mid cap mutual funds and small cap mutual fund. There can be many variation of funds by making hybrid out of these three types. An investor can opt one fund from each category to have a good diversified investment.

4. Index funds are better than sectoral funds- Historically Index funds have performed better than any sectoral fund. Sectoral funds are made up of investment in a companies of a particular sector viz. technology companies, infrastructure companies, finance companies, FMCG etc. As a general perception, funds of technology sector is regarded as a great fund but still compared to index funds they are no better than the later. Same is the case with Infra sector funds. Many a times such funds have given very marginal return only.

5.  Equity MF only-  If investment is being done for a long term then it should be in only equity mutual funds instead of Debt mutual funds. If an investor is looking for safe and assured return better he should opt to invest in Fixed Deposit or Gold. FD and Gold have given better returns compared to Debt funds.

6.  NFO not always a good choice- New Fund Offer ( NFO) is generally thought attractive because its NAV is lesser than the existing funds. But for investment purpose NFO is not necessarily a good choice. As there is no historical data available showing performance of the fund, it is not prudent to opt NFO. 

7.   Timing of exit-  An investor should also have plan to exit from the fund on certain point of time. As a thumb rule if the fund has given lower return in the last two years compared to NIFTY 50 ( Index fund), then its better to exit the fund as there may be some fundamental flaw in the fund. However in case of need of cash one can exit anytime but tax implication should be kept in mind.     

If the above points are considered while investing in  mutual funds, then there is fair chance for the investor to get good return on his investment.