Mutual funds investment depends upon market fluctuations. Pay attention to the advertisements displayed by mutual fund companies before investing. Risks relate to any type of investment and this is with no particular reference of investment in direct mutual fund. One of the striking features about a mutual fund is that you can invest as per your risk appetite. The level of risk depends upon your investment objectives and generally higher levels of risk means higher returns.
Clearly understand your risk tolerance levels.
Before going to choose a mutual fund you need to figure out what you can tolerate and what ceases to be your risk appetite. The tolerance levels are an indicator of the market volatility you can handle.
Risk and returns are two sides of the same coin. Where the risk is high scope of returns are higher. If your risk capacity is low opt for debt based mutual funds and they are considered to be the safest form of investment.
Figure out your asset allocation
Once the levels of risk are clear you can outline your asset allocation. This is a mixture of asset class outlining your investment portfolio. A tip is to diversify among the various investment classes depending upon how much time you are planning to invest. This would also boil down to the levels of risk you are comfortable with.
A poor asset allocation is going to show your risk tolerance in poor light as it boils to high risk, medium risk and poor risk takers.
How to go about choose the best mutual funds
On thousands of mutual funds to choose from and various brands offering them investor could face an overload of information and end up making unwanted mistakes. Once you are aware of your asset allocation you need to choose a mutual fund that is based on your investment goals. You need to consider these goals in the choice of a mutual fund.
- Observe the past performance –past performance cannot always assure a better future performance. People start with this method, but they stop here as well. To look at funds is one of the only steps in evaluation of a fund. The performance of the fund along with fund managers is to be evaluated in due course of time. Just go through the fund ever since it has been launched to evaluate its performance
- The age of a fund- it makes sense to invest in funds which are more than 5 years old as they possess a track record that can be easily compiled with. Just check out the performance record of a mutual fund and figure out if it is more than 10 years old
- The risk aspect- the choice of a mutual fund once again boils down to the levels of risk you are subject to considering. For varied risk takers there are different types of funds in a market. You can choose a fund as per your risk appetite
By following the above processes you can choose a mutual fund as per your choice.