July 13, 2024
Ditching Doubt: How to Choose the Perfect Mutual Fund for You

Ditching Doubt: How to Choose the Perfect Mutual Fund for You

Investing in mutual funds can be an adventurous move for many. The sweet lure of high returns often draws our attention and seemingly makes us forget all the potential risks involved. This is especially true for ELSS mutual funds that offer additional tax benefits. However, going ahead with the investment, without fearing the roadblocks of doubt and uncertainty, can be quite a challenge. In this piece, we aim to ease out your doubts and help you in choosing the perfect mutual fund for you.

Perfect Mutual Fund

First and foremost, understanding what a mutual fund is and how it functions can remove doubts to a great extent. Mutual funds are an investment vehicle in which a number of investors pool their money to invest in different assets like stocks, bonds, or other funds. One of the many types of mutual funds is an Equity Linked Saving Scheme (ELSS) mutual funds. ELSS mutual funds primarily invest in equity and offer tax benefits under section 80C of the Income Tax Act, which can make these funds an attractive investment option.

Right at the onset, remember that choosing a mutual fund is not a race. You don’t have to rush or get influenced by market trends. Your objective should be to understand your own financial goals and risk tolerance. Do you intend to build a corpus for your retirement or to fund your child’s education? Or is it to save taxes by investing in ELSS mutual funds? Having clarity on these aspects makes half the job done.

ELSS Mutual Funds

When choosing ELSS mutual funds or any other variant, keep your time horizon in mind. ELSS mutual funds have a mandatory lock-in period of 3 years, hence they might not serve your purpose if you need liquidity in the short period. In terms of other mutual funds, you need to match the fund’s investment strategy with your time horizon.

See also: systematic investment plan calculator

Next, evaluate the past performance of the fund. It can provide an insight into how the fund manager has navigated through different market scenarios. However, remember that past performance is not a guarantee of future results. It should not be the sole parameter for deciding on a fund.

Examine the cost factor with due diligence too. Every mutual fund comes with an expense ratio, which directly impacts your returns. For instance, if you invest INR 1 lakh in a fund with an expense ratio of 2%, you end up paying INR 2,000 per annum to the fund manager. This directly eats into your returns. So, compare the expense ratios of different funds before deciding.

While assessing ELSS mutual funds or other schemes, never forget to consider your risk appetite. Different funds entail different levels of risk. Typically, equity mutual funds including ELSS mutual funds are associated with higher risks compared to liquid or debt funds.

Conclusion

At last, it’s important to note that investing in mutual funds is not a one-time exercise but a continuous process. Review your portfolio periodically, at least once a year, to keep up with the market dynamics.

Mutual fund investments are subject to market risks, and one should carefully consider all risk factors before investing. Always consult your financial advisor or do thorough research before making any investment decisions.

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