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Crucial things to keep in mind before Investing in Mutual Fund schemes

Nov. 22, 2020, 5:06 p.m.

New Delhi (Anish Yande): Before investing in a mutual fund, there are several factors to keep in mind. Experts suggest that before investing, it is crucial to understand the goals and the risk tolerance of your investments. To avoid losses in mutual funds, you should follow these recommended steps by experts to secure your investment as much as possible.

Things to Keep in Mind before Investing in Mutual Funds:

The first step that experts recommend before investing in mutual funds is analysis and assessment. The first step includes an analysis of the asset management company’s performance in the past. A comprehensive study of a company’s past performance can be obtained through various sources, with companies themselves presenting their investing history on their websites. 

‘Goals’ in investing stand for your overall aims to achieve through your investment, whether it be securing your current wealth or focusing on gains. ‘Risk tolerance’ indicates the type of reactions you could have after witnessing instability in the market. Along with the analysis, assessment of the portfolio of the mutual fund scheme is equally important. 

If you tend to be overly concerned often about your investments, it would be suitable to pick a more stable mutual fund scheme. 

Tools For Strengthening of Assessments:

Portfolio parameters are an important aspect of mutual funds. These parameters cover a wide range of information concerning the mutual fund you choose. Credit Risk and the prospects of RoI are the foremost parameters to consider. Parameters such as concentration risk to sectors, liquidity of securities, should be considered before selecting a particular fund.

SEBI has introduced several initiatives to provide more reliable information to investors. SEBI has issued directions to companies to provide more disclosures on the portfolio level. Earlier, companies would receive 30 days for disclosure of debt securities transactions, which has been reduced to 15 days by SEBI. Security level yields and mid-month portfolios would also be issued regularly by companies.

Investors should make use of these disclosures to inform their decisions.

Riskometer is another essential tool for gauging the prospects of an asset management company. The riskometer constitutes five categories of investment risks, which range from Low to High.  

SEBI has issued directives from next year that the riskometer would be expanded to a new sixth category, ‘Very High.’ Additionally, risks shall be recorded, considering volatility, liquidity, credit, and market capitalization.

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