Even though most people are familiar with the term mutual funds, many are not sure about what it means. Mutual funds are increasingly becoming popular as a means of investment. If you are an earning individual, you have most probably invested your earnings in a savings account. However, the returns provided by savings accounts are not enough to meet your long term financial goals. Which is why, individuals are turning towards other means of investments for better returns such as a mutual fund.
What is a Mutual fund?
Mutual funds are an investment instrument that pools the money of several investors to invest in multiple assets of the financial markets. The investments are managed by an institution known Asset Management Company or AMC. They are a great investment instrument that will enable you to reap the benefits of share markets with lesser risks. Mutual fund investments involve less risk as the investments are managed by the qualified professionals of the AMC. There are basically three types of mutual funds i.e. equity based funds with high risks, balance funds with medium risk and debt funds with low risks.
How to choose a mutual fund scheme?
Investing your hard earned money is a serious decision. Since there are numerous companies offering mutual funds, an investor tends to get confused while making the final decision. These pointers will help you choose the right mutual funds scheme:-
- Risk profile: – Before making the final decision of purchase, it is very important to match the risks of the mutual fund investment scheme with your risk profile. The risks of a scheme varies according to the types of assets invested in. If you are willing to take more risks for higher returns, choose schemes that are equity based. For those who are risk averse, balanced mutual funds or debt based mutual funds would be more appropriate.
- Read the fine print: – The prospectus features all the details of the scheme, hence it is very important read through the entire document. The funds that offer a higher rate of return may carry a high amount of risk as well. Therefore, only choose a scheme after careful evaluation.
- Costs: – Mutual funds carry various costs in the form of fees which vary from company to company. Even a small difference in the costs can have a bearing on the final returns. Hence before buying a mutual funds, ensure that the extra costs are not eating into your returns.