It's not very tough to understand Mutual Funds. In simple terms it is a collection or contribution of funds by those interested to invest their money. Those who pool in their funds are called investors and even unit holders. Now, Investments can be of different type. These can be stocks, shares, debt securities or a combination of all.
Now, managing these funds is no child's play, though if you have a sound knowledge and understanding of the market then sure it can be, but generally there are experts who manage your collective money and are called Money Managers or Fund Managers. So basically, all the pooled funds are invested by these managers, basis the financial goals of the investors into different types of funds to maintain a balance in case one or the other fund perform well or not. Now the next big question arises is: should one invest in Mutual Funds? And if your answer is a yes, you must be very sure of a few other answers. Such as:
- What are your financial goals and expectations from your investments?
- What sort of funds you want to invest in Gold, Debt, Equity or any other?
- How much money can you park and for how much duration?
- What is your risk taking ability?
And several such other questions, so you are sure enough of your decision. Also, when investing, you must check the past performance of funds and the latest Net Asset Values (NAVs). Sometimes it is not the performance of funds, it is also the expertise and experience of the fund manager that can make you lose or gain out of your investments. Hence, it is also important to choose a fund manager wisely or trust an experienced Mutual Fund companies or Asset Management Companies (AMCs).
Take care of fee and hidden costs associated with mutual funds. Paying 2 to 4% annual fee when your returns are just 5 to 6% makes no sense. You should not be paying fee that is equals to your return. So take care of hidden costs & fee before investing or buying any scheme.
The only reason that makes warren buffet that he is today is long term believe. He truly thinks long term and he is a successful man. Short term focus or one year focus prevents managers to think long term and force them to change their strategy in the middle of the year to save their performance. Try to go for long term plans and let managers do their work for better returns on your investment. So this becomes another key area to focus and decide on, as many funds have lock in period and amongst open ended and closed ended, in case of later, it might become a problem to pull your funds back.
Keep track of market because sometimes money overrules fundamentals. Managers will never say a single word against stock market and if they do so they'll have to face their boss. A manager priority is to bring the money in and say good about their funds. To be on the safer side one should keep track of market before investing.
Managers get their payments in form of incentives. They'll get bonus if their fund performs well and bonuses encourage gambling. To get good returns they'll start experimenting and if the gamble works then it'll be a big bonus time else they'll start again after a bad year.
Thus, when you plan investment in Mutual funds, make a calculated and informed move!
Shared by reliancemutual.com