Those who are good at financial planning often do not find it difficult to manage their money. That’s because the golden rule of financial planning is to have a defined set of short term and long term financial goals. To achieve these goals, investment planning is essential. There are a plethora of investment schemes to choose from, but investors only consider investing in those avenues that hold the potential to help with their investment objective. If you are someone who carries moderate to moderately high risk appetite, then you can consider investing in a mutual fund. Mutual funds are market linked schemes that seek capital appreciation over the long term. They are supposed to carry a diversified portfolio and since they are professionally managed, mutual funds offer active risk management.
However, investing in mutual funds is far better than investing in direct equities. One unit of a mutual fund is a combination of multiple stocks and other money market instruments. Mutual funds give investors an opportunity to invest in multiple stocks through one single investment. To invest in mutual funds, especially for someone who is new, making an investment decision can become a tad difficult. That’s because there are literally over hundreds of mutual fund schemes offered by different AMCs and fund houses. Also there are multiple mutual fund categories such as equity, debt, solution oriented, banking & PSU, index, ETF, hybrid etc. This is why investors should have a decent financial plan in order to help them make better investment decisions.
Here’s why one should compare mutual funds before buying them:
Different mutual funds carry different risk profile
Depending on the nature of the scheme and its investment objective, each mutual fund carries a different risk profile. For example, an equity mutual fund carries a high risk profile because it predominantly invests in stocks and other equity related instruments. On the other hand, a short term fund is supposed to carry a low risk profile because it invests in securities that mature within a short time frame. This is why investors need to compare mutual funds so that they are able to compare the risks that they carry and invest in one that aligns with their risk appetite.
The expense ratio of a mutual fund is the recurring cost like management fees, advertising costs, allocation charges, etc. which necessary to keep a mutual fund running. These costs are recovered by the fund house by charging the investors an annual fee in the form of an expense ratio. Direct plans usually have a low expense ratio because these plans are bought directly from the fund house. Regular plans are distributed by agents, brokers, aggregators and hence levy a higher expense ratio. This is why comparing the expense ratio of various mutual funds is essential while investing.
Measure category performance
Say you want to invest in an ELSS scheme so that you can save tax and earn some capital appreciation in the long run. But there are so many AMCs and fund houses offering ELSS schemes and hence investors need to compare the performance of these schemes amongst each other to determine which ELSS scheme has been consistent in terms of income generation. Comparing the funds’ past performance will also help investors understand which scheme is a better performing compared to others that fall in the same category.
Minimum SIP investment
A Systematic Investment Plan or SIP is an easy and hassle free way to invest in mutual funds at periodic intervals. Each mutual fund has a different minimum investment amount for starting a monthly SIP. For example, some funds have a minimum SIP investment amount of Rs. 1000 while others offer monthly SIP investment option of Rs 500 per month. If you are not comfortable with investing Rs. 1000 per month, then you may have to invest in a mutual fund that gives the option of investing Rs. 500 per month. If you are unsure how much money you need to invest regularly in order to achieve your financial goals, you can refer to a SIP calculator which is easily available online.
Now that you know why comparing mutual funds is important, make sure that you do so while building your investment portfolio.
Mutual fund investments are subject to market risks, read all scheme related documents carefully