#FinancialBytes: 5 things to consider before investing in mutual funds
However, before investing in mutual funds, one must pay attention to a few things, including the involved risks, to make the right choice and grow their wealth in the longer term.
Here are 5 things to keep in mind while investing in mutual funds.
Before investing, understand what's your financial goal or purpose
One must have a definite purpose or a specific financial goal, they want to gain from their mutual fund investments. It can be a savings goal, retirement fund, or child's education, etc.
Potential investors should have a clear idea about the purpose. This will help them make dedicated savings, plan investment better, and project the growth required for reaching their goals.
Should be persistent with investment; don't expect immediate results
People must also remember that mutual funds, just like any other investment option, take some time to deliver results. One cannot expect results right from the beginning.
Initially, investors may also lose some money. But they should not stop investing; they must do it regularly (and carefully) to achieve success.
Persistence and good money management skills will help investors gain from mutual funds.
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Investors should be aware of the tax liabilities
One of the biggest mistakes people make while investing in mutual funds is that they do not inquire about the tax implications of a particular scheme.
Before planning to invest, it's essential for potential investors to be aware of the tax liabilities.
They should know if their investments would be tax-free or taxed. If taxable, they should find out how it affects the returns.
Analyze performance of a few schemes before choosing one
Potential investors must always analyze the past performance of a particular mutual fund scheme, before investing.
However, past performance should not be the sole parameter to be considered, as it may not be the same in the future.
They should analyze other factors like risk exposure, portfolio composition, risk-adjusted returns, and turnover ratio, among others. They should compare a few schemes before picking one.
About the portfolio of a mutual fund scheme
Before investing, one should also pay attention to the portfolio of a particular mutual fund scheme.
According to their risk appetite, potential investors can structure their portfolio as per market capitalization (exposure to small, mid, or large cap stocks) and fund management style.
They should thoroughly go through the scheme's offer document to get a better understanding before investing their money.