Mutual Fund: Investing in mutual funds has become commonplace these days. Investors, both large and small, are showing interest because it’s considered an easier and relatively safer option than investing directly in the stock market. However, choosing the right mutual fund remains a challenge for many. Often, investors make decisions based solely on the returns of the past 3 to 5 years, while understanding the true quality of a fund requires considering many other factors as well.
Aniruddha Gupta, CEO of Ashiana Financial Services, says that if investors keep a few key points in mind, it can be easier to achieve stable and better returns from mutual funds. Let’s explore six key points to consider before investing.
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Keep these things in mind before investing
- A fund’s AUM (Assets Under Management) indicates the total amount of investment managed by that fund. According to Aniruddha Gupta, the AUM of any fund should be at least ₹1, 000 crore. A very small AUM may indicate that the fund is at risk and its returns may be volatile. A large AUM reflects the fund’s stability and investor confidence.
- The older a mutual fund is, the better its valuation can be. It’s wise to choose a fund that is at least 5 years old, as such a fund has weathered market fluctuations and its performance can gauge its stability.
- When investing in a mutual fund, it’s crucial to pay attention to the expense ratio. This is the fee the fund manager charges for managing the fund. The lower the expense ratio, the greater the investor’s profit margin. Therefore, it’s always better to prefer funds with lower expenses.
- Alpha indicates how well your fund is performing relative to the market index. For example, if the index returned 10% and your fund returned 15%,the alpha is 5. This means the fund has outperformed the market. A fund with a high alpha may be a good investment option.
- Beta indicates how sensitive a fund is to market fluctuations. A beta greater than 1 means the fund is more volatile than the market, meaning it is slightly riskier. A beta less than 1 indicates a relatively stable fund. Investors with a lower risk tolerance should choose funds with a lower beta.
- The turnover ratio indicates how frequently a fund’s portfolio is traded or changed. A ratio greater than 40% indicates a high level of trading within the fund, which can increase risk. Funds with a turnover ratio of less than 40% are considered more stable and safe.
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What is a Mutual Fund?
A mutual fund is an investment vehicle that pools the money of many investors and invests it in stocks, bonds, or other securities. It is managed by professional fund managers, whose objective is to maximize returns for investors. For those who do not want to invest directly in the stock market, mutual funds can be a convenient and safe option.