Investing is an essential step towards achieving financial goals and securing a prosperous future. However, with numerous investment options available, it’s crucial to identify the investment vehicles that align with your specific needs. One such option is mutual fund investment. Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. They offer advantages such as professional management by financial experts, risk diversification, affordability, and liquidity. However, understanding your investment needs and risk appetite is key to making informed decisions and choosing the most appropriate mutual fund. Here, Bajaj Finserv Mutual Fund aims to explore the benefits of mutual fund investment and how to choose mutual fund schemes for your specific investment goals.
How to choose a mutual fund scheme
Understanding mutual funds
A mutual fund is an investment vehicle managed by a professional fund manager. It pools money from multiple investors who have a common investment objective. The fund manager then invests this money in a diverse portfolio of assets such as equities, bonds, money market instruments, and other securities. Fund managers ensure that the portfolio composition of the fund is always in line with the scheme’s objectives despite varying market conditions.
Importance of understanding your investment needs and goals
When it comes to mutual fund investments, it is essential to have a clear understanding of your investment needs and goals. You must consider
Market volatility: Volatility is a crucial consideration, as you want to ensure that your investments face relatively less volatility. This can be achieved by opting for relatively low-risk investments such as government bonds or high-quality corporate bonds.
Income: Income generation is another important aspect, especially if you rely on your investments for regular cash flow. Dividend-paying stocks, bonds, or real estate investment trusts (REITs) can provide a steady stream of income.
Growth: Capital growth is sought after by investors aiming to increase the value of their investments over time. This can be pursued through investments in growth-oriented assets such as stocks of companies that offer a high potential for growth.
Thus, by assessing your requirements in terms of your risk-appetite, and capital growth, you can make informed investment decisions that align with your goals.
How to choose a mutual fund scheme as per your risk profile?
Assessing your risk profile is a crucial step in making investment in mutual funds. While experienced investors may be aware of their risk tolerance, new ones may have limited knowledge about the risks associated with mutual funds and may struggle to pick a suitable fund basis their risk appetite. In certain situations, investors may also become anxious when market volatility arises. Therefore, understanding one’s risk profile is essential in any investment endeavour. Particularly in the case of mutual funds, the suitability of a product depends largely on the investor’s characteristics.
So, investors must always consider factors such as their investment objectives, desired investment duration, risk tolerance, minimum investment amount, etc. Evaluating the risk profile is a fundamental aspect of making informed investment choices.
Types of mutual funds
Equity funds: Invest primarily in stocks to generate long-term capital growth. You can consider investing Bajaj Finserv Flexi Cap Fund for wealth creation/capital appreciation over the long term.
Debt funds: Invest in fixed-income securities like bonds with an aim to provide relatively steady income.
Index funds: Aim to replicate the performance of a specific market index subject to tracking error.
Sector funds: Concentrate investments in specific sectors or industries for potential high returns.
Tax saving funds: Equity-Linked Savings Scheme (ELSS) provide tax benefits under Section 80C of the Income Tax Act while offering potential returns from equity investments.
Money market funds: Invest in short-term, low-risk instruments like Treasury Bills and commercial paper for less volatility on capital and liquidity.
Hybrid funds: Combine equity and debt instruments to provide a balanced mix of growth and income.
Exchange-Traded Funds (ETFs): Trade on stock exchanges like a stock and aim to track the performance of an underlying index or asset class, subject to tracking error.
Fund of Funds (FoF): Invest in other mutual funds to achieve diversification across various fund types and asset classes.
Analysing fund performance: Key metrics and factors to consider
When evaluating mutual funds, several key metrics are used to assess the performance and potential. The most basic metric to assess a mutual fund are its returns. This is indicated by an increase or decrease in the fund’s net asset value (NAV) over a specific period.
Comparing a fund’s returns to its benchmark index, past performance, or similar funds in the same category can also provide valuable insights. However, it must be noted that the past performance may not necessarily guarantee similar returns in the future. It’s recommended to seek help of a financial advisor before making any investment decisions.
Investment needs vary from individual to individual and understanding them is crucial when considering mutual funds as an investment option.
By aligning your investment needs to different mutual fund schemes, you can choose the ones that suit your goals, risk appetite, and time horizon. It’s essential to evaluate your financial objectives, desired level of risk-taking, income requirements, and long-term capital growth expectations. With careful analysis and consideration of your financial goals needs, investment in mutual funds can be an effective tool to help you achieve your financial goals.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.