Over the past 10 years or so, mutual funds have been more and more popular as a mode of investment. It is basically an investment vehicle, consisting of a collection of funds from different investors. Here are some basic features of these funds, which will help you understand them in a better manner.
1. Easy Diversification
The majority of mutual funds require a humble minimum investment, which ranges from some hundred to some thousand bucks. This therefore allows the investors to go for a diversified portfolio in a considerably cheaper manner than they can make on their own.
2. Variety of Equity funds
Certain categories of the different kinds of funds incorporate sector funds, growth funds and index funds. Growth funds purchase shares pertaining to burgeoning companies, while sector funds purchase shares belonging to companies in a specific sector, such as health care and technology. Again, Index funds happen to be the ones that purchase shares of each stock in a specific index.
3. Diverse flavors exist for bond funds
Various funds exist catering to everyone’s taste. If you wish to park the money for only a month or less, invest in liquid funds. Again, go for ultra short term funds in case you wish to invest for a period of less than 6 months. If the investment plans are for over a year, opt for short term funds. Like this, depending upon your time span, you may select an appropriate debt fund.
4. Think about the risks that lie in obtaining returns
Prior to buying a fund, take into account the risks that lie in its investments. If your risk-taking ability is low, it is always preferable to opt for funds that are subject to low market risks.
5. Low expenses are very important
In case of mutual funds, a certain portion of the total assets are charged for the purpose of covering their expenses and build profits. Expenses might not seem sizeable at not exceeding a few percentage points each year. But still, they seem to generate a substantial performance drag over the passage of time.
6. Taxes
Taxes are indeed a huge bite from performance. Not selling off the fund shares may land you with a huge bite of tax. Investors are over and over again surprised to learn that they need to pay taxes, which take into account capital gains as well as dividends.
7. No need to hunt for the winners
During selection of a mutual fund, it is advisable to look for long-term and consistent results. It should be remembered that funds which rank extremely high across a period hardly ever finish on top in the long run.
8. Make your portfolio founded on diversified equity funds
When an equity fund is diversified, it means investment is made across a range of sectors. These equity funds will come up with greater risk adjusted returns across every other investment asset classes, considering the long term perspective. For any kind of long term portfolio, the best thing is to make equity funds the foundation.
