Questions to ask before investing in mutual funds

The phenomenal growth of the mutual fund industry over the last decade is a testimony to its rising popularity among investors. Data from the Association of Mutual Funds in India (AMFI) reveals the Asset Under Management (AUM) of the industry to stand at Rs 27.05 trillion¹ as of Nov 30, 2019, from Rs 8.22 trillion during the same period 10 years ago.

While mutual fund investment can help you build a corpus for essential life goals in a disciplined and sustained manner, there are certain questions that you need to ask before investing in them.

What is my financial goal?

A goal-based investment approach ensures you have the money when required. You must have a clarity of the goal that you wish to achieve through mutual fund investments. There are different types of mutual funds, each serving a specific purpose. For instance, if your goal is to build an emergency corpus, you can opt for liquid funds. These funds invest in securities with a maturity period of 91 days and can be easily redeemed when needed.

Similarly, if you aim to accumulate wealth for your retirement, you can opt for equity funds which can deliver higher returns in the long term, subject to prevalent market conditions. Thus, it’s important to invest in a fund that aligns with your financial goals.

What is my risk appetite?

Risk appetite refers to your risk tolerance. It reflects the quantum of risk you can take with your investment. Mutual fund investments are subject to market risks and the returns are not guaranteed.

However, risk levels differ across funds. For example, equity funds are more volatile compared to debt funds. If you are an aggressive investor with a high-risk appetite, you can opt for the former. On the other hand, if market fluctuations make you jittery, you can invest in debt funds.

If you have a moderate risk appetite, you can invest in hybrid funds, which are a combination of equity and debt.

Do I invest through SIP or lump sum?

You can invest in mutual funds through a Systematic Investment Plan (SIP) or lump sum. In the former, a fixed amount of money is deducted at a pre-defined interval and invested in your chosen fund. In the latter, you invest a big amount at one go.

While SIPs inculcate a disciplined savings habit, lump sum comes handy in case you receive a windfall such as a bonus.

What is the fund’s track record?

Though the past performance of a mutual fund does not guarantee future returns in the same proportion, it’s advisable to examine the track record of a fund before investing in it. It will help you to know how the fund had performed in the past under different market conditions and helps you formulate your investment strategy accordingly.

You can find the data regarding the past performance of mutual fund on its website itself or on numerous third-party sites that offer such services. Else, you can take help of a professional to know about the track record of a fund and determine whether you should invest in it or not.

Conclusion

Investing in mutual funds allows you to diversify your investments and can help you accomplish your various life goals. In case of a dilemma, you can seek professional advice.

Mutual funds are subject to market risk; we advise to read all scheme-related documents carefully.

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Data Source:
¹ https://www.amfiindia.com/indian-mutual

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