An investor always strives to diversify their investments to receive maximum returns while limiting their risk exposure. With different types of investments readily available at disposal, it might get overwhelming to choose the right investment option for your portfolio. One such widespread investment avenue is mutual funds. Though mutual funds have the reputation of generating substantial returns when invested for a prolonged period, provided you invest in the right set of mutual fund schemes. So, how should one go about it?. This article aims to offer a few tips to the investors to successfully analyze their mutual fund investments.
- Apples to apples: Compare your schemes to suitable benchmarks
An investor must ensure that they compare their investments to a fitting benchmark. For instance, if you wish to evaluate how well your mutual fund is performing, it is suggested to compare their returns with the average returns of the other funds in the same category.
- Understand the economic cycle
Time periods are vital tools to comprehend the working of a particular mutual fund scheme. However, you must not remove a fund from the investment portfolio due to just one bad year. This is considered as overstepping and is a practice frowned by most mutual fund experts.
- Don’t forget to factor in the expense ratio of the fund
Investments in mutual funds come with a cost. To operate and manage the mutual fund schemes for an investor, a fund house or an AMC (asset management company) charges a fee known as expense ratio to investors. These expenses usually comprise of management fees and other costs such as trading fees, legal fees, auditor fees, and any other operational expenses. The higher the expense ratio, the lesser would be your take home returns. Thus, look for funds with a lower expense ratio.
- Take manager tenure into account
Manager tenure is the time period for which a managerhas been at the nook of mutual funds. It is crucial to take manager tenure into account along with other performance indicators. For instance, a strong 5-year return might not be that promising if the manager is at the helm for merely a year.
- Understand the differences between good and bad performance
Investors must understand when the performance of their mutual funds are decent and when it is poor. A fund that has performed exceptionally poor in the last year, could produce exceptional returns in a three-year time period. Hence, abnormally high, or poor returns do not always equal good or poor performance.
Using the above tips can help you make smart and informed investment decisions about purchasing the right mutual funds for your investment portfolio. With numerous types of mutual funds readily offered to investors, be mindful of choosing the funds that best align with your investment portfolio. Happy investing!