Is it good to invest in mutual funds and what are the factors to be considered before investing in mutual funds?

Mutual funds are a good investment opportunity for anyone looking at wealth creation and meeting their personal goals. Choosing the right mutual fund is not a very easy task. There are a lot of parameters that need to be looked into before investing in the mutual fund of your choice. And it is very difficult to get the correct combination of all the necessary parameters in one mutual fund. Nevertheless, having a list of important criteria makes the search a lot easier and effective. Some of the important parameters one needs to look into are as follows:
i. Experience of the fund management team: A check over the experience of the fund management team may ensure that you give your hard-earned money incompetent and deserving hands. The more experienced the fund manager, the higher the chances of generating alpha.
ii. History of the fund house: When you invest in a mutual fund, you are trusting the fund house to manage your money. Decisions taken by the fund house and the fund manager may have a direct impact on your investment's performance and the realization of your financial goals. Hence, it is important to do a check on the fund house, history of existence, track record across schemes before selecting a scheme.
iii. Past performance: Knowing how a fund has performed in the past can’t tell you how the fund will perform in the future, but it can tell you how the fund compares to other funds with the same investment objective. Ideally, you should review a fund’s performance for a couple of years and how it performed in different market conditions.
iv. Size of the fund: Invest in funds that are neither too big nor too small. Somewhere in the range of Rs3,000-10,000 crore should be sufficient. This is because small funds tend to have high fees. Large funds tend to have a problem with allocating money efficiently.
v. Investment objective: Every mutual fund scheme, irrespective of the category - whether equity or debt has an investment objective. It is this investment objective which entails them to invest in various asset classes in defined proportions. As investors, it is imperative to check the investment objective of the respective mutual fund scheme, and thereby see whether it matches your end goal. For example, if you have an objective of capital appreciation with a long-term investment horizon in mind and are willing to take the risk, then equity-oriented mutual funds will work better for you.
vi. Costs matter: An exit load is a charge levied when you sell your units of a mutual fund within a particular tenure. Thus, it is important that you invest in a fund with a low exit load, and more importantly, stay invested for the long term. There are other expenses like an expense ratio, which need to be compared across similar funds. Comparing the fund’s costs and performance against those of similar funds will shed light as to the kind of value you’re getting for your money.
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