Mutual Funds

Why is so important to invest in the right mutual fund?

Investing in all mutual funds is not the same. Even if you look at the last 1 year alone, there are some mutual funds that have given a return of +15%(in a falling market!) and others have performed even worse than the market, giving returns of -20%.

Therefore, it is very important to invest in the right mutual fund. Invest in a mutual fund keeping the following things in mind:

1. Past returns: Compare the past returns of different mutual funds before investing, selecting the funds which given superior returns.
Look at returns over both a 1 year and 3 year horizon. Do not worry if returns in the last 6 months or 1 year are negative, since if the market performs badly, the returns can be negative over a short time horizon.

2. Fund type: Fund type ie the type of assets the fund invests in is a very important factor to be taken into consideration. Some funds funds invest in equity, some in debt and others in a mix of both. What is most important is that the asset class should be selected based on the general interest rates prevalent in the economy. If RBI has kept interest rates high, det should be a good option since once interest rates start coming down, debt funds will make money. If RBI has kept interest rates, invest in equitry schemes.
Economic growth has recently been low/there has been a mild depression. Once economic growth rebounds, equity funds should do well.

3. Take a long term view: Once you have selected a mutual fund after thorough research and invested in it, sit back and relax.
Don't worry if in the short term the returns are low or negative. That can always happen if the market is performing poorly.
In the long term your patience should pay off and you will be rewarded with handsome returns, if your choice has been good.

 

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