How to Choose Mutual Funds for Beginners [Complete Guide]

For a beginner, before investing in mutual funds, one should have knowledge about the parameters of mutual funds. There are many parameters in mutual funds.

Which are Risk tolerance, return expectation, investment horizon, expense ratio, past performance, fund manager experience, and assets under management. It is essential to have knowledge of all these parameters before investing.

If you have planning for investing in mutual funds online in India then read this article.

How to choose mutual funds for beginners:

For an experienced investor or a beginner, the first step is to stick to your goal. He/she must be clear on his investment. So let’s talk about some important strategies which you should know about before investing.

How much risk you can tolerate in investment, for how many years you will invest, and in which scheme you will invest should be clear from the first.

If you do not have the correct mindset, if there is a small fluctuation in the investment, then you may prefer to exit, but this is not right. So first you need to fix it on your target.

Some important parameters before investing:

Now we’ll discuss some important factors if you want to invest your money in mutual funds then read all these points carefully.

• Risk Management:

The risk in something comes when you don’t have accurate information about that investment. Before investing, you need to know how much risk you can comfortably manage this is called risk management.

The fundamental reason on which the risk of mutual funds depends on debt, corporate bonds, equity, etc. The price of all these investments also fluctuates. Which leads to being subjected to loss. The main reason for this loss is the fall in the NAV(Net Asset Value).

• Investment strategy:

Almost all investors ignore this aspect of investing. But it holds a large part of future success. The investment strategy is also considered a very large aspect of investment.

In this, fund houses adopt all kinds of decisions and provide decisions. If the investment strategy of the fund houses does not match your investment philosophy, a conflict of interest arises here and it automatically leads to exit from the investment at an undesirable price.

• Fund performance in mutual fund investment:

The performance of the fund also matters in mutual funds. The performance of the fund is also considered in a reasonable time frame.

This ensures that the investment operates through various market cycles or has passed through this path. If the fund is not able to cross the benchmark in 3, 5, 7, or 10 years, then we get the information from here that the fund is not a good investment.

When we are evaluating the performance of the fund, the most important task for us is to get the details of the fund performance from the manager of the fund management team. A strong, experienced management team is the main reason for the benefit of investors.

• Expense Ratio in Mutual funds:

The expense ratio is the commission or fee charged by the investment team.
The expense ratio is calculated by dividing total fund costs by total fund assets.

Expense Ratio Calculation = Total fund costs/Total fund assets

The expense ratio is a derivative of Assets Under Management (AUM). Higher AUM and lower expense ratios are believed to be good for investment.

It is better for investors to target lower expense ratios. Because, even if this ratio looks small when it is calculated on the amount of total investment, it holds a large part of the investment and has a large impact on the investment.

• Entry and Exit Load in Mutual Funds:

Entry load: The amount (fee) charged to investors by fund houses is called entry load.
Exit load: The money charged by the fund houses at the time of exit from the investment scheme is called exit load.

An investor should invest in a zero entry and exit load investment scheme.

• Taxes in Mutual funds:

The returns earned in Mutual Funds are subject to tax. Hence the return of mutual funds is taxable. Long Term Capital Gains in Mutual Funds mean that the investment is for a period of 12 months or more.

Short Term Capital Gains in Mutual Funds mean that the investment is made for a time period of fewer than 12 months.

Equity mutual funds tax on Long Term Capital Gains is 10%. Similarly, the tax on Short Term Capital Gains is 15%.

• Direct plans in Mutual Funds:

There are two types of plans in Mutual Funds. One is direct plans and another is regular plans. Investors in direct plans can buy NAV units directly through fund houses. But in Regular plans, we have to buy NAV units through any broker.

Direct plans get a slightly higher return than regular plans and at the same time commission expenses are not incurred in the return of Direct plans.

In regular plans of Mutual Funds, the Asset Management Company or AMC pays a commission to the broker. This commission reduces the amount of principal amount and also reduces the amount of return.

Conclusion: How to Choose Mutual Funds for Beginners

If you want to start your investing journey in mutual funds then this content is so helpful for you. Investment in mutual funds is so easy but before investing you should know about all the important factors. If you have any doubts regarding this topic then share your comments with us.

wishing you a happy investment journey…………………!