Investing in mutual funds has become a simpler and easier process with the advent of various online platforms. You can now invest in or sell any mutual fund scheme from the comfort of your home. But the plethora of existing schemes across various categories and new fund offers being launched every week can make it difficult for you to pick the right mutual fund scheme.
Moreover, there are galore of sources that give out mutual fund advice and are easily available on various apps such as Whatsapp, Twitter, Telegram, etc. as well as on various mutual fund forums. It is important to note that these sources can often be contrarian/conflicting in their views; and thus, you are likely to face confusion and information overload.
Besides, not all sources that you receive mutual fund advice from have your best interest at heart, or the investor’s interest at the fore, while there could be others that may lack the extensive experience and hence, fail to answer certain crucial questions that you may have.
If you too have been following such sources for investment advice, here is why it is important to ensure that the source is a credible and reliable one…
1) To get a personalized investment plan
When it comes to mutual fund investment, one cannot simply follow the ‘one size fits all’ approach. This is because investing is an individualistic exercise that has to be done as per your financial needs, risk profile, investment objectives, and time horizon to goals. A good mutual fund adviser is the one that carefully carries out a detailed assessment of these aspects and accordingly curates a suitable portfolio. And since your financial needs, investment goals, and risk profile can undergo changes over time, it is vital that your adviser reviews the portfolio periodically and carries out rebalancing if necessary.
2) To stay on the right path to your financial goals
The best investment strategies are the one that are simple yet time-tested, certainly not the ones that promise to make you rich quick. In today’s world where many investors are attracted to NFOs, IPOs, and new-age investment options such as cryptocurrencies, it is important to adopt a rational approach. Creating long-term wealth requires you, the investor, to exercise patience so your investments have time to grow. The right mutual fund advice can enable you to stay focused on your financial plan and maintain the right asset allocation, instead of the distracting market noise.
3) To get research-backed recommendations
Depending entirely on unsolicited tips circulating on various online apps and investment forums for your mutual fund decisions is neither a smart nor a prudent approach. Remember that, if recommendations aren’t backed by sound research processes, they are unlikely to live upto your expectations. While some advisers may lure you to invest in schemes that may not have a reliable track record or have generated a one-off stellar performance, you should enquire about the schemes that have performed consistently well across bull and bear market phases. Also ask about returns across 1-year, 3-year, 5-year and 7-year time frame, and performance in terms of risk-reward ratios like Sharpe Ratio, Sortino Ratio, and Standard Deviation over a 3-year period. Qualitative aspects such as the efficiency of the fund house to adherence to processes and the fund manager’s experience play equally important roles in selecting the right mutual fund. Another aspect to watch out for is the extent of concentration of the holdings in the scheme. The aim is to have holdings that are well-diversified across asset classes.
4) To gain transparency
A good mutual fund adviser proactively updates investors about various opportunities and risks related to investment. They are also open to answer any queries and resolve grievances that you may have. In addition, they help you understand about various charges related to mutual fund investment, such as exit load, tax implication of different schemes, lock-in period if any, options/plans available under the scheme, how and where your money will be invested. These are important for you to be able to take an informed decision.
In the current year, the equity market is expected to remain volatile due to various headwinds at play, such as geopolitical tensions, interest rate hike, fear of new COVID-19 variants, pace of economic growth, and expensive equity market valuations. Thus, 2022 is the year to be extra cautious about your mutual fund investments.
This article first appeared on PersonalFN here