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21The SMART Approach For Mutual Fund Investing!Apr-15-2020

The SMART Approach For Mutual Fund Investing!

Blog by – Mr. Ashish Ajmera
Investing in mutual funds has become extremely popular and convenient in recent times. One of the biggest advantages of mutual fund schemes is that they are managed by professional experts. However, in order to ensure that your hard earned money is invested in the right place, you have to understand your long-term financial goals. This makes it critical to make an informed decision before investing your hard earned money into mutual funds. The long term performance of the fund is linked to its investment objective and you have to keep in mind that it is aligned with your financial goals as well. While it is preferable to avail a mutual funds advisory service before starting your investment journey, one can use a SMART approach to select best mutual funds for their financial wellness.

Sense of proper understanding of financial goals

Having a fair and broad sense of awareness about your financial position is the starting point for mutual fund investments. It is extremely important to express your investment goals in clear and measurable terms. You should be able to project the trend in your future expenses and also be able to estimate your likely savings in order to determine the amounts needed to be invested right now and over the coming years. One important factor over here which is often overlooked is the family’s needs and aspirations. Keep in mind the long term financial goals of not just yourself, but also your loved ones in order to come up with a holistic investment plan.

Macroeconomic environment

Financial markets track not just the current business environment but also tend to factor in the future prospects for businesses and sectors. This makes it essential to analyse the trends in the economy before investing in mutual funds. Many times, in stressful economic conditions equity markets tend to collapse as investors tend to price in the worst possible outcomes. However, markets tend to rebound sharply when the economic cycle turns around and corporate earnings improve.

Alpha of Mutual fund scheme

Investors also need to look at the Alpha of the fund. Alpha, basically measures the difference between a fund`s actual returns and its expected performance. Alpha indicates what extra or less return your fund manager has generated in comparison to the benchmark index. Investors can check out the Alpha on a regular basis to see if the fund has been able to grate positive returns on a consistent basis and has effectively managed to beat the benchmark index.

Risk appetite and tolerance levels

It is important to remember that best mutual fund selection does not just mean choosing to invest in the fund which is providing the best returns. An investor has to carefully think about factors like his risk appetite and financial needs before deciding to put his money in a particular fund. If an investor is thinking about parking funds for a very long period say around 15-20 years, then it makes sense to think about funds which can provide excellent returns over a long term and which have good quality stocks with high profitability compared to peers and scalability in operations.

Time horizon

Always be certain about the time frame that you have in mind before committing to a particular investment. While goals and objectives are critical long term factors, ensure that you are only investing the funds which are unlikely to be needed in the short term or in case of a financial emergency. This is critical because the market cycles could turn volatile and untimely withdrawal of money from mutual funds could not be a wise investing decision.

Conclusion:

Apart from the above parameters, few other simple factors also help in deciding which mutual funds to buy. Past performance of a fund manager can be considered as a rather important factor. Expense ratio is also critical as it covers all fund management and distribution expenses of a fund. It determines the cost of your investment. Remember that mutual funds are of different types. For investors who have a high risk appetite, it is always advisable to invest in equity mutual funds which typically offer the highest amount of returns in medium to long term though these investments are exposed to short term fluctuations in share markets. For investors with a low risk appetite, investment in debt mutual funds is a good option as it helps reduce the volatility and brings a stable dimension to your mutual fund investments.

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