As shown in the advertisements you must have heard mutual funds are subject to market risks, and you must read the offer document carefully before investing. Well you heard it right, they come with their own risks and rewards. And some one wisely said, the devil always lies in the details. So here is a little insight on mutual funds.

What are mutual funds?

Mutual funds simply mean, collecting money from individual investors and then collectively investing it in stocks, bonds and other money market instruments depending on which scheme and objective you have chosen to invest in, during the purchase. Here the trades are held in diverse holdings of companies and are professionally managed.

Playing it safe

It is best to avoid pitfalls of commission, incentives or gifts offered on a certain scheme, if you invest your capital, it is not necessary the name of a scheme will do exactly what it says. Let’s take for argument sake, a retirement scheme. As the name suggests it is meant to create corpus for your retirement. But there will be other schemes who can optimise the same objective, for this you need to be well informed or researched about the schemes you are looking to invest in. Getting carried away with the name will not necessarily achieve the objective. So caution needs to be maintained before capitalising.

When you are undecided of investing in a certain scheme, a decision should not be purely based on the schemes past performance, there could be many reason for the funds spur for performance. Past performance is a good indication but sometimes an up spur could be in just for the moment which may not be sustainable, due to geographical or economic reasons. At times it could mean it’s a larger risk to your investment and you need to be careful before you access a fund based on its past performance. The NAV or Net Asset Value also can help you understand where the fund is headed and you can keep track of the account statement and redeem your investments, if required.

Also putting your capital away in a fund or scheme purely based on past performance is not the right way to go about creating your portfolio.

Optimise your investments

In order to optimise your investments, keeping your investment objective and risk appetite in mind before you pick your debt or equity scheme is significant. Investing in well performing high-risk funds are likely to give you better-returns. You need to be cautious of your investment as certain risks could force your capital to go dry.

Allocating your assets strategically and tactically will help optimise returns, but these should be reviewed regularly. A check on the changing market cycle, performance and outlook on various asset classes, availability of new attractive investment opportunities will help you optimise your returns and be one step ahead of the rest.

To sum up

Optimizing your investments will make your money work for you and help get better returns. Mutual funds are a risky-business and you need to be very careful in what scheme you are putting your money in. It is best to allocate your assets across various asset classes rather than put your money in any one. An NAV will help you understand better to keep track of the fund as investing in a fund based on past performance will hold high-risk to your capital.

This is a partnered post.