Money Blog

20 USEFUL TIPS FOR INVESTING IN MUTUAL FUNDS

1. Buy ongoing schemes with good NAV track record
Do not go on the NAVs alone while purchasing units of mutual fund. Generally there is a misconception among people that during NFOs units are available at Rs. 10 and in an ongoing scheme the units may be available at a higher price and therefore purchasing units during NFOs is cheaper than in ongoing schemes. This is not true, because in a mutual fund scheme it is the amount invested that matters and not the units purchased, you will get a return on your investment. It is possible that an ongoing scheme may give you better returns than the amount invested in an NFO over a period of time. Secondly, in an ongoing scheme the initial NFO expenses have already been amortized and it has a proven track record of performance.

2. Always read the Offer Document
Always read the offer document or key information memorandum carefully before investing. It contains vital and correct information about the mutual fund scheme.

3. Buy schemes with low Entry Loads
Look for the entry load in the scheme. Equity funds generally have an entry load of 2.25% and debt funds between 0.5 to 1%. Some close ended schemes and lock in period schemes have zero entry loads. It is a crucial deciding factor while choosing a mutual fund scheme to invest. Compare various schemes for entry loads.

4. Never overlook Exit Load
Some mutual fund schemes may be tricky, they might offer a zero entry load, but may put heavy exit load. Generally mutual fund schemes which have an entry load do not have any exit load, but some lock in period schemes may have an exit load if you redeem your investment before the lock in period has expired. There fore check the exit load carefully.

5. Avoid cchemes with new Fund Managers
Always check out the fund manager of the mutual fund and how long has he been associated with the scheme. See the performance of the fund during his tenure. If a scheme has performed very well, but its fund manager is recently changed, it may be doubtful that it will replicate the past performance, until the fund manager proves it otherwise, therefore it is safe not to invest in such a scheme.

6. Track past performance of the fund before investing
Always look for weekly, monthly, quarterly and annual performance of the scheme. It should show a steady growth. Look at the returns during the periods of recession and compare performance of various mutual fund schemes to choose the best.

7. Decide your risk appetite before investing
Before making an investment in a mutual fund, make up your mind on how much risk can you put your investments to. If you want to take a calculated risk, go for a hybrid fund and if you do not want to take much risk you may invest in a debt fund.

8. Decide the type of scheme you want to invest in
There are a number of schemes available in the market. You have to decide the type of scheme you want to invest in. An investor who trusts only frontrunners may invest in some blue chip fund. An investor who forsees the potential of future leading companies may invest in midcap fund. You may be working in a particular sector and you know the strengths and weaknesses of that sector, you may use your knowledge to choose a good scheme.

9. Choose the right option - Dividend or Growth
After deciding the scheme, the next question is whether to go for dividend or growth option. In case of dividend option, a portion of investment is redeemed and is distributed as dividend among investors, in this way a portion of profit is booked at regular intervals. In case of growth option, profit is not booked and distributed, and long term growth is sought. If you are of the view that a portion of the profit should be booked as the markets are risky and unpredictable, you should go for the dividend option.

10. Buy at the time of dividend declaration
Some sales persons would call you to inform that the record date has been fixed for declaration of dividend and buy units before the record date and get a portion back in the form of dividend. It seems to be an attractive proposal, but the sales person deliberately forgets to tell you that after declaration of the dividend the NAV of the scheme will come down to off set the effect of dividend payout. There is no profit in this transaction. However, this may be a good aspect for tax planning, because the dividend received by you is tax free, and the current price has come below your purchase price and thereby decreasing your capital gains in the long run.

11. Look at the portfolio of the fund
You have checked the performance of the scheme. Now it would always be prudent to see the portfolio of stocks in which the funds have been invested, in case it is an ongoing scheme. Look at the track record of the individual stocks and sectors which are represented in the portfolio. From this exercise you will get a view of the fund manager’s ability to generate profits in the scheme.

12. Always make your payments by cheque in the name of the scheme
Mutual funds always take payments in the names of respective schemes launched by them; therefore always write the cheque in the name of the scheme you are investing in. Make sure that your money is going in the right hands.

13. Check the asset allocation of the scheme
Check the asset allocation pattern of the scheme given in the key information memorandum. It is the range in which the funds will be invested. Like equity from 65 to 100% and debt instruments 0 to 35%. Ensure that this is in line with the equity mix you had decided.

14. Watch for expenses of the scheme mentioned in Offer Document
There are some expenses of the mutual fund which are given in the key information memorandum. These may be NFO expenses and recurring expenses. Compare these expenses of various schemes and how will they be amortised.

15. Draw comparison with benchmark Index
A comparison with the benchmark index is shown in the key information memorandum. If it is an equity fund, its benchmark index may be S&P CNX Nifty. The performance of the fund should be better than the benchmark index, consistently.

16. Opt schemes with switch options
Mutual fund schemes generally have switching options. In hybrid funds, you may have an option to switch from 80% equity mix to 60% equity mix. And you can also switch between dividend and growth options. You may find switching profitable if suddenly equity markets start crashing or there is some bad news or there is a temporary recession. You can switch from more equity oriented to more debt oriented portfolio to hedge your investments. Therefore always look for switching options in the schemes and how often can you use them.

17. Keep your investment horizon more than a year to save Capital Gains Tax
As per the Income Tax Act of India, if listed securities or mutual fund units are sold after holding them for less than one year the profits earned will be short term capital gains and if the securities are held for more than one year the profits are long term capital gains. Long term capital gains are tax free and short term capital gains would attract a tax of 10%. Therefore this fact should be kept in mind while deciding the time horizon of your investments. If you want to sell your investments in the 10th or 11th month, it is advisable to hold them for one year and save tax of 10%.

18. Buy during corrections
Stock Markets are cyclic in nature, try to invest in mutual funds on small corrections or declines in the stock markets. This may get you a lower NAV of the same scheme.

19. Choose between Open-ended or Close-ended
If your time horizon of investment is long term and you are convinced with the long term trend of markets, you should choose a close ended fund. But make sure that it has exit options in case of emergencies with exit loads.

20. Do not blindly follow the recommendations of the salesperson
Do your own research, read offer documents of various schemes, see rankings of schemes on the internet or in maagzines. The sales person might be interested in selling a particular scheme in which he would earn maximum commission, the commissions are generally higher in New fund Offers and in equity funds as compared to debt funds. His judgment may be biased.