Ask These 5 Questions Before You Invest in Mutual Funds

Investing money in the right financial instruments is the key to creating wealth in life. But a common problem that many people in India face is the difficulty in choosing the right option, given the wide range of instruments available. Amongst all options, mutual fund is one of the most sought-after instrument.

Mutual fund investment is an option wherein many investors pool in money, and it is then invested in various assets like stocks and bonds. Since there are various types of mutual fund schemes, it is again a complicated situation for investors, particularly beginners, to understand which way to go. They look for various reliable sources of information as well as mutual fund investment advice from financial advisors like FinEdge.

Here are some common questions that most people ask about mutual fund investments before starting to invest in this financial instrument:

1. When Should An Individual Start Investing in Mutual Funds?

The importance of financial planning varies from one individual to another. For some people, living an enriched life is about utilizing their earnings in the right way. For others, it is about taking risks in business to reach greater heights. When it comes to investing money, it is always good to start as early as possible. It is because the more time you give to your investments, the higher returns you can expect.

To invest in mutual funds, make sure you have considered your existing liabilities and your decisions are need-based.

2. Are Mutual Fund Investments Only Stock Market Based?

Many people think of mutual funds as just a way to invest in equities, which is not entirely true. There are various types of mutual funds which you can choose as per your investment needs and risk appetite. For instance, investors who want higher returns irrespective of the risk involved choose to invest in equity-based mutual fund schemes. For risk-averse investors, there are options like liquid funds.

If you feel doubtful about choosing the right mutual fund investment approach, seek advice from renowned financial advisors.

3. Why Should We Invest in Mutual Funds For The Long Term?

Consider an analogy to understand the importance of long-term mutual fund investment approach –

A professional player who has a certain style of playing helps his team win most of the matches. This means that he will be able to accumulate more winnings if he continues to play for the same team, no matter how many ups and downs he faces during his career.

Similarly, mutual fund investments face various market-linked fluctuations which are beyond the control of the investor. But if you choose to invest in mutual funds for a long term, you get the experience as well as knowledge to deal with the various fluctuations and hurdles, thus getting better returns over time.

4. How Do Investors Get Returns From Their Mutual Fund Investments?

Like many other financial instruments, returns from mutual fund investments are calculated based on the appreciation or decline in the Net Asset Value (NAV).

NAV stands for the price of mutual fund units an individual has bought at a specific time. It is used to calculate the returns you will receive over the investment period. The returns that investors receive is the difference between the purchase date NAV and sale date NAV. The net dividend is then divided amongst the investors based on their investment proportions.

5. Is There Any Expense Incurred While Investing in Mutual Funds?

Mutual fund companies offer a variety of services to the investor to help them achieve their financial goals. Every mutual fund investor needs to pay a certain amount of fee as defined by the percentage of scheme’s corpus. This fee can only be charged up to certain limits as defined by SEBI regulations. As per these regulations, the maximum expenses charged as a percentage of Assets Under Management (AUM) comes down with the growth of fund size.

As the wise men say, – ‘To never stop learning is the key to success in life.’ So, it is always good to learn about mutual fund investments and clear your doubts before you start your investment journey.