5 Things to Know Before Investing in Mutual Funds

WHAT FACTORS TO CONSIDER BEFORE INVESTING IN MUTUAL FUNDS?

1. Know the Companies in which the SIP Invests

Every systematic investment plan invests its funds into a group of companies from different sectors. So, as an investor, you must check the profile of the companies picked by the fund house. Understand their performance over the past few years along with considering any news related to the firms, their financials, and future prospects.

2. Understand your Risk Appetite

When you are sure about your financial goal, you must also be confident about the level of risk you are ready to take to achieve that goal. An investor can be a conservative, moderate or an aggressive investor. Know which type of investor you are before investing in mutual funds via SIP.

If you are a conservative investor, investing in large-cap funds can be your ideal choice. Such funds mostly include big companies that are considered safe to invest because they are likely to be well-established players in their respective field. If you are a moderate investor, then large cap and multi-cap schemes (also known as diversified equity) are the best options for you.

For aggressive investors, midcap and small-cap schemes, which are commonly known as high returns-high risks schemes, are the best choice.

3. Know the Fund House

A fund house is the heart of your SIP investing experience and performance of the scheme. When you invest in a scheme, you are primarily giving it the mandate to manage the money on our behalf. Hence, selecting the right fund house is essential as various fund houses are specializing in different asset classes and their scheme performance differs significantly.

Your fund selection process must focus on management quality, experience and investment philosophy. Understand their investment processes, risk measures and operational efficiency. You can get a good idea of fund house by visiting their websites, reading basic details in scheme documents or accessing online research reports.

4. Understand the SIP Installment Lock-in Period

In case of a SIP in ELSS mutual funds, very often a delusion exists that, the entire investment can be withdrawn once the lock-in period of 3 years is over. But that’s not true!

The fact is that your every installment of SIP must complete the lock-in tenure. So, let’s say if you put in Rs 5,000 through SIP in January 2018, the lock-in period for this one installment will get over in January 2021. Similarly, other SIP installments need to complete 3 years lock-in as well.

However, if you are investing in an open-ended mutual fund, there will be no lock-in period for your SIP as well.

5. Understand the Tax impact on SIP Returns

The tax impact entirely depends on the type of mutual fund you invest in and when you redeem your investment.

Conclusion:

Simply put, SIP investment is nothing but an automated mode of investment to avoid human inertia. To get better returns, you still need to research and periodically check the health of your portfolio.

In the end, investing in mutual funds via SIP is all about discipline and the time spent. Once, you have mastered these two, along with compounding, mutual funds can surely help you tide over any financial blues and reach your goals.