The Indian stock market has witnessed a route since January 1, 2020 as the Sensex has tumbled by almost 15,000 points since, primarily due to the ongoing coronavirus crisis. Given the lows, many investors are considering to pump in funds as this could be a nice time to reap benefits later. However, the decline in the market should not be the only reason to invest in mutual funds as the market can be unpredictable.
As experts suggest choosing the right mutual fund starts with defining a goal and identifying risk factors, here are few things to keep in mind while buying the right mutual fund.
Identifying a goal
Many people invest in mutual funds without identifying a specific purpose. As a result, they get tempted and stop investing or withdraw their investments. This highlights the importance of identifying a goal.
“If somebody is investing for retirement, it doesn’t matter whether the investments are down 20 percent today. It’s vital to define short term, medium term and long term financial goals and invest accordingly,” suggests Ankur Choudhary, Co-Founder and CIO, Goalwise.
Depending upon the goal, one can choose the type of mutual fund they need to invest in. For short term - one can start with debt/liquid funds, for medium-term - multicap funds and for the long term - large cap equity mutual funds, experts say.
Evaluate risk factors
Before identifying a mutual fund, the investor should evaluate the risks associated with the investment.
“Equity mutual fund investments are subject to volatility and thus the portfolio might see ups and downs in the short term. Although, the returns can be substantially higher than other types of funds, these might be suitable for aggressive investors with a reasonably long time frame,” according to investment platform Groww.
"Debt mutual funds, on the other hand are more stable, but give lower returns than equity funds. These might be suitable for conservative investors," the platform suggests.
Mode of investment
In mutual funds, money can be parked using both Systematic Investment Plans (SIPs) or lump-sum investment options. In SIP mode, investors are required to invest a small amount of money in a disciplined way, while in lump-sum investment, they can put the fund in one go at the start of the investment cycle.
“For investors who earn a monthly salary, SIPs are a good way to invest. They can save monthly and invest monthly. SIPs also help in averaging out the ups and downs of the market fluctuations,” says Choudhary.
SIPs allow investors to buy more units of a mutual fund when the market is low and reduce the per-unit cost of investment.
"Those who have a big lump sum to invest must go for liquid fund and then do a systematic switch into equity funds over 6-12 months so as to avoid getting too unlucky with the entry price," he explains.
The performance of the fund is crucial in case somebody is investing for the long term. This helps in finding out how consistent a fund has been in different market cycles.
"Looking into the historical performance of the mutual fund is of utmost importance as an investor’s ultimate objective for investing is to generate returns. Investors are advised to analyse the returns generated by the particular fund over various periods and compare them with the returns generated from other funds under the same asset class," explains Archit Gupta, CEO and Founder, ClearTax.