Every time we decide to acquire a big item in our daily life, like a household appliance, we carefully study, consider each component, and then narrow down our choices. We are more likely to like the products we purchase if we are aware of what to anticipate from them.
With mutual funds, the situation is the same. You must be aware of a few things before investing in them in order to have a successful investment experience.
The six things you should know before investing in mutual funds are covered in this blog.
1. Different Mutual Fund Categories Have Different Risk Levels
The first and most crucial fact is that each category of mutual funds has a distinct level of risk. Based on a common scale or common criterion, you cannot declare that a certain mutual fund category has a high risk or a low risk. Yes, equities mutual funds offer low risk when compared to direct stock investments. However, each type of mutual funds has a unique level of risk.
Therefore, we should always examine the riskometer of a mutual fund before investing. You can see the risks you will be taking with each plan since each one has a risk associated with it.
2. Direct Plans Give Higher Returns
The second crucial factor is that direct plans have a lower expense ratio than standard plans. As a result, Direct plans produce more returns than Regular plans.
Currently, some investors believe that the direct plans and regular plans of mutual fund schemes are distinct from one another. That is untrue. These are basically different versions of the same plan. The sole distinction is that no commission or brokerage is imposed in direct plans because there is no agent or broker involved. As a result, the fund house will incur lesser charges, which will ultimately result in lower yearly fees for your assets.
3. You won’t get the same returns every year
Annualized returns are typically mentioned while discussing mutual fund performance. This may give you the notion that your returns would be consistent year after year.
Let's say a specific mutual fund scheme has annualised returns of 8%. This does not imply that you will consistently make 8%. This is due to the nonlinear returns of mutual funds. For instance, a mutual fund scheme can offer you +10% returns in the first year and barely -2% returns in the following year. There may also be times when no returns are made. As a result, you should be ready for this unpredictability in your annual returns.
4. Consistency of returns is a hallmark of good funds
A mutual fund scheme that consistently returns 10% is preferable than one that consistently delivers +17% in the first year and -10% in the second year.
Now, why is this performance consistency significant? so that the losses can be minimised and your chances of making significant returns are increased. For instance, a 5% annual decline means the fund must produce returns of about 11% to make up the loss and provide you with a 5% return. As a result, over the long run, a stable fund will produce superior annualised returns.
Decide on a steady fund every time.
5. SIPs Help Create Investing Discipline
Automated investing using SIPs not only promotes discipline but also allows you to profit from market turbulence. This is so that you may buy more units for the same price when the market declines. This aids in lowering your overall investment cost. This process, known as rupee cost averaging, might eventually help you make high profits.
6. Asset Allocation and Periodic Rebalancing are Crucial
An old saying goes, "Never put all your eggs in one basket." And when it comes to investing, this is also significant. To lower your portfolio risk, asset allocation involves distributing your investments among different asset types. Decide how much you will invest in various asset types, such as shares, gold, debt, etc., before you begin investing.
Asset allocation is important, but without rebalancing it won't be as effective as it may be. Rebalancing is the process of taking gains from an asset class whenever it increases in value and its share of your portfolio decreases and reinvesting those earnings in other asset classes that are also a portion of your portfolio.
