Mutual funds are a great way to get a piece of the market action without having to roll up your sleeves, because someone else, an expert in fact, will be doing that for you. Mutual funds have traditionally been popular for their ability to make money and their ease, two major reasons for even the non investment types to root for them.
Having said that, we must never forget that like any market dependent product, Mutual Funds too have their risks and a close watch is important to earn long term benefits.
Tips for Investment in Mutual Funds
If you are starting off with mutual funds and if you are someone who is still in the phase of learning more, the set of tips below could help-
1. Diversification- To reduce the risk of a sudden high performance element going down affecting others, you might as well have a more balanced and diversified portfolio. Investing fully in one area, sector, will increase the risk of you being more adversely affected when that sector falls.
2. The money you pay for expertise- For investing your funds profitably, you pay a fee/ charge to the company that is called Expense Ratio ( among other expenses that vary from company to company) . The net money or fund value that one gets is actually after the company has already deducted their charges/ expenses. The ratio of what you pay to what you get after deductions should always be low. Scout for companies, that among other positive attributes, also have this factor.
3. Follow performances- A fund’s performance cannot be judged over a short period or from reading reviews online. Understand the performance through a thorough study over a greater period of time. Go back to even a year if need be and compare it.
4. The Fund Fact Sheet- The fund fact sheet is an indispensable tool in the hands of the diligent mutual funds investor. Almost all the important info that you need to know, is available in the fact sheet, and even more important than getting hold of one, is the understanding part. Understanding the Standard Deviation will help you see a pattern;the Sharpe return will help you understand the returns delivered as against the risk taken. See if you can take a class to understand these basics and then on the fund fact sheet will start making a lot of sense.