Mutual funds have become a favorable investment avenue for seasoned as well as novice investors in recent years. Contributing to their popularity are the benefits like professional management, diversification, convenience, and returns potential. However, identifying the best mutual funds for your portfolio can be a tad bit challenging, especially for beginners. The process requires you to compare mutual funds based on various parameters such as past performance, fund management, risk ratio, expense ratio, and more.
How to Choose Mutual Funds?
One of the initial steps to identify the best mutual funds is to establish your investment goal. Are you saving for a short-term goal like a vacation or a long-term goal such as retirement? Each goal will require a different type of mutual fund. Equity funds are ideal for long-term goals whereas debt funds can be considered for short-term goals.
Comparing Mutual Funds
You begin your journey of fund selection by comparing mutual funds. Comparison of schemes gives you the insight to select the one that satisfies your financial goals. Comparing mutual funds means understanding the various types of mutual funds there are- equity, debt, hybrid, and others, and differentiating them based on their holdings, average returns, expense ratio, etc.
Several portals provide the option to compare mutual funds not only based on their types but also taking into consideration their investment objectives, return history, risk appetite, benchmark indices, and fund manager’s background. It is considered prudent to compare different categories of funds-hybrid, equity, debt, etc. and within a category, it is advisable to compare funds with a similar investment mandate.
Returns
Average returns over the past 5 to 10 years should play a crucial role while comparing mutual funds. However, it would be ill-judged to rely solely on the past performance, as the future performance is not necessarily linked to the past.
The risk ratio is another key parameter to consider. It represents the volatility of the fund and how much it deviates from the average return. Hence, it directly impacts your decision to invest in that fund. A fund manager’s credentials and the expense ratio of the fund, which represents the cost of managing the fund, should also be considered while comparing.
How to Calculate SIP Returns?
Another necessary task in fund selection is understanding how to calculate SIP returns. Systematic Investment Plan (SIP) is an investment option offered by most mutual funds where you invest a fixed amount regularly, thereby averaging out your cost of investing and benefiting from the power of compounding.
Calculating SIP returns can give you a perspective on your fund’s performance over time, as well as help you project the likely future value of your investments. This estimate can be achieved by using the SIP return calculator. You simply have to enter the SIP amount, the expected rate of return, and the tenure of the SIP. The calculator will then tell you the maturity value. For instance, a consistent SIP of ₹5000 every month, with an average annual return of 12% over a period of 15 years, will give you ₹17,79,672.
Before ending, it’s crucial to note that investments in mutual funds carry inherent risks. Apart from market volatility, other risks can stem from the issuer’s credit risk, liquidity risk, and interest rate risk. Therefore, before investing, thorough research is of utmost importance.
Choosing the best mutual funds requires a disciplined approach and sound knowledge base. There are several good options available in the market, however, to make the right choice, remember to compare mutual funds and calculate SIP returns, keeping your financial objectives and risk tolerance in mind.
Conclusion
In conclusion, mutual fund investments can be a great way to grow your wealth if you take the time to understand, compare, and carefully select the right fund for you. They provide varied options, high liquidity, and the potential for good returns if handled with an informed approach.
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