Mutual fund checklist

Here’s what you should know before you invest in mutual funds

Investing in mutual funds requires that you have a fair amount of knowledge of securities market, economy and the law governing mutual funds apart from an all-round knowledge and a bit of street smartness. This article makes you aware of:

  • What are the points that help you to arrive at a decision while investing in mutual funds?
  • Learn how mutual funds can be a better option
  • How to invest in mutual funds?

Investing in mutual funds requires that you have a fair amount of knowledge of securities market, economy and the law governing mutual funds apart from an all-round knowledge and a bit of street smartness.

When you buy mutual funds you are actually investing in the shares of a certain corporation which is an investment company or a trust. Such corporations share the dividend earned on their investments among all the investors.

Thus the fruit of some of the finest money management is eaten by all the investors. We will briefly see how mutual funds work before proceeding on to explore ways of investing in mutual funds.

How to Buy Mutual Funds?

Mutual funds work on the principle of pooling money from countless number of investors and investing in various instruments such as bonds, stocks and money market in short term instruments.

This means investors who do not or were not able to buy shares from other buyers or from exchanges can buy shares/units of mutual funds that have purchased the same shares.

A mutual fund basically trades like any other investor which also means that the mutual fund continues to buy and sell shares with the sole purpose of making the most optimal returns on the investments.

The entire earnings are shared among the share holders of a particular fund whose names are recorded in the books of the mutual fund on a given date (record date) though some funds have a different ways of sharing the dividends.

When you buy a mutual fund, you are effectively buying shares into the fund. In other words you do not directly own the stocks, but you only own the money that is used to buy those stocks on your behalf.

However even on your part, you need to make an investment decision when you buy shares of a particular mutual fund.

Checklist to help you with mutual fund investing

  • Decide on the amount of money you can set aside to investing in mutual funds
  • Decide for your self whether you can wait till a new fund is launched and you can buy at their IPO or buy from the secondary market or from the company it self (IPO’s generally do not charge any loads/fees)
  • Open end funds have greater liquidity in comparison to closed end funds which have a limited number of shares. Pick your investment from these.
  • The important decision is when you have to pick an instrument to invest in. There are many funds with very good performance records. They will have invested in particular genre and sector of securities.

What type of mutual fund should you pick?

  • Funds invested on short term money market instruments return higher returns but carry a greater element of risk than funds invested on bonds and G-Secs.
  • Though Index Funds are a volatile lot, they all the more follow the same curve as the index; you can derive higher returns depending on your timing of entry and exit.
  • Industry experts recommend funds which returned stable and increasing income over various periods to short term high returning funds. You can consider funds that returned consistently and considerably for three years.
  • Double check on mutual funds that invest in stocks of non public companies and derivatives or real estate and mortgages. Non public companies and others here are not at obligation to publish financial results and so you have no way of knowing the performance of your investment tied to these companies
  • Do not forget to check on the history and experience of the mutual funds you have short listed.
Index funds returns vs. S&P500
Index funds returns vs. S&P500 (Source: Fool.com)

Are mutual funds a better option for investing?

There are times when every one of us has thought to invest in all opportunities. One striking reason for not doing so is the lack of relevant knowledge.

As opposed to this think of some mutual funds that have expert professionals who are knowledgeable of the market and economy too apart from maximizing returns and minimizing risks.

With mutual funds you can invest in smaller amounts of money while you spread it among securities you will not even realize you have minimized your risk of loss of capital.

Now, if your answer is a NO to ‘whether you can do the same thing buying index scrip or a real estate with a similar amount of money’ you have answered right. Mutual funds are for real a better investment option.