When you make purchases in your life, like buying a household appliance, you are likely to do thorough research and carefully choose what to purchase. The same is true for mutual funds. Before investing in these funds, you need to be aware of a few things that will help you have a rewarding investing experience.
In this blog, we will discuss the five basic things you need to know before investing in mutual funds for the first time.
Top 5 Things to Know Before Investing in Mutual Funds
Let’s quickly look into the five basic things to know before investing in mutual funds.
1. Level of Risk
It's important to note that the risk associated with each mutual fund category is different. You can't simply label a mutual fund category as low-risk using a standard scale or parameter.
It's crucial to assess the risk for each fund before making any investments and match it with your risk tolerance levels.
2. Direct Plans Offer Better Returns
Another aspect to consider is that direct plans have lower expense ratios compared to regular plans, resulting in higher returns. Some investors mistakenly believe that direct plans and regular plans for mutual fund schemes are the same – this is not the case.
They both are two options for the scheme, with the main difference being that direct plans do not involve agents or brokers, hence eliminating commission or brokerage fees. This, in turn, leads to a decrease in the fees you have to pay for your investments.
3. No Same Return Every Year
Mutual fund returns are typically annualized returns when you hear about them. This may create the idea that you will earn the same return every year. Suppose a specific Mutual Fund Scheme has annualized returns of 9%. It does not imply that you will earn 9% every year. This is due to the nonlinear nature of mutual fund returns.
A mutual fund scheme, for instance, might yield returns of 10% in the first year and just 2% in the second. There may also be times when there are no returns. Thus, you should be ready for this kind of variation in your yearly returns.
4. Consistent Returns Characterize Good Funds
A specific mutual fund scheme that consistently gives 10% returns is preferable to one that gives 17% returns in the first year and 10% returns in the second. Now, why is this performance consistency significant? It is important in order to reduce your losses and increase your chances of making profitable investments.
For example, a 5% annual decline implies that the fund needs to provide returns of about 11% in order to offset the loss and provide you with a 5% return. That's why a consistent fund will give better returns on an annualized basis on a long-term basis. So, remember to always choose a consistent fund.
5. Using Calculators
Before investing in mutual funds, use a SIP calculator or lumpsum calculator. This tool allows you to project potential returns based on your investment amount, tenure, and expected rate of return.
By using a calculator, investors can make informed decisions, plan investments systematically, and better comprehend the growth potential of their mutual fund investments.
Final Words
Now that you understand these five basic things about mutual funds, you're ready to embark on your investing journey. To start investing in mutual funds, consider Dhan. Dhan empowers you to make informed decisions and kickstart your path toward financial growth.
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