5 Steps to Selecting the Right Mutual Fund in the Indian Market
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Selecting a mutual fund in the Indian market can be daunting, especially for those new to investing. There are more than 2500 mutual funds in the Indian market, each with risks and rewards. However, following a few key steps can increase your chances of selecting a mutual fund that aligns with your investment goals and risk tolerance.
Identify your investment goals
Before looking at specific mutual funds, you must clearly understand what you want to achieve with your investment. Are you saving for retirement, a down payment on a house, or some other long-term goal? Or are you looking for short-term gains? Your investment time horizon and risk tolerance will help you narrow your options and choose a mutual fund that aligns with your goals.
Consider your risk tolerance
Mutual funds come with varying levels of risk, so it’s important to choose one that aligns with your risk tolerance. If you’re a more conservative investor, you may want to select a mutual fund with a lower level of risk, such as a debt or a balanced fund. On the other hand, if you’re comfortable with higher levels of risk and are looking for potentially higher returns, consider an equity fund.
Research fund options
Once you clearly understand your investment goals and risk tolerance, it’s time to start researching specific mutual fund options. Look for mutual funds with a good track record, low fees, and a diverse portfolio. You can find this information on the mutual fund company’s website or through a financial advisor.
Understand the fees
Mutual funds charge fees for their management and other services. These fees can eat into your investment returns, so it’s important to understand what fees you’ll be paying and how they compare to other mutual funds. Look for mutual funds with low expense ratios, as these will generally have lower fees.
Diversify your portfolio
It’s generally a good idea to diversify your investment portfolio by including a mix of asset classes, such as stocks, bonds, and cash. This can help reduce your overall risk and increase the likelihood of positive returns over the long term. When selecting a mutual fund, consider choosing one that offers a diverse range of investments within a specific asset class or across multiple asset classes.
Following these steps can increase your chances of selecting a mutual fund that aligns with your investment goals and risk tolerance.
The next set of choices you need to make are
Choose between Passive or Active strategy.
You can achieve your goals by combining index and active strategies. Many investors begin with a core portfolio of index funds and add actively managed funds for specific market segments.
What are Index funds & ETFs
An investment vehicle that tracks a market index or a specific market segment. But all index funds are not created equally.
Or try to beat market returns with active funds where the fund manager is paid to outperform the index.
In Passive, you can choose between Index funds or ETFs.
If you decide on a passive strategy, you’ll also need to decide what kind of funds you want to invest.
- Index Mutual funds hold a portfolio of stocks or bonds, and its net asset value (NAV) is generated at the end of each day based on the closing prices of all securities the fund holds. You pay or get the previous night’s closing price when you buy or sell mutual fund units.
- Exchange-traded funds (ETFs) also own a portfolio of stocks or bonds, but their shares, like stocks, trade on an exchange with continuously changing prices.
Unlike mutual funds, the current share price of an ETF is not always completely aligned with the underlying investments’ values. However, for highly liquid ETFs, these values tend to remain extremely close.
Please remember to regularly review your mutual fund holdings to make sure they continue to meet your needs and adjust your portfolio as needed. It’s also a good idea to seek the guidance of a financial advisor who can help you make informed decisions about your investment strategy.