Optimal diversification can help to largely reduce the investment risk.
Before choosing a mutual fund, it is important to determine your financial goal. Once you have your goals set, you can choose the appropriate mutual fund product in sync with your short or long term financial goals.
Expense ratio
The expense ratio is what a fund house charges its investors for various costs incurred in managing a mutual fund. For example, a fund has an emergency room of 0.99%, which means that for every Rs 100 invested in that fund, you have to pay Rs 0.99 to the fund house, and therefore your final returns may be lower by that amount. You need to see your profits against the fund’s emergency room. It is built into the fund’s share price, which is its net asset value. There is also a difference between regular or direct plans of the same fund.
Tax implications
Tax bill plays an important role in choosing a mutual fund. The tax rate is based on the mutual fund category and the investment horizon. For example, an investment period of more than a year is considered long-term when investing in equity funds. You must remain invested for more than three years to enter the long-term investment in a debt fund category. Short term capital gains (STCG) in equity funds are subject to a 15% tax and long term capital gains (LTCG) are tax free up to Rs 1 lakh in a fiscal year. The LTCG above this threshold is taxed at 10%. In the case of debt instruments, the STCG is taxed at the investor’s applicable ceiling rate, while the LTCG is taxed at a tax rate of 20% along with the indexation advantage.
Means to Invest
You should give preference to funds that meet your criteria, such as: B. Return consistency, management efficiency, performance against a benchmark, zero or minimal exit load, etc. For example, you could invest in a fund that has consistently outperformed a fund manager with a proven track record has consistently outperformed its benchmark, and after one Year there is no exit load. However, past performance should not be the only decisive criterion, as it cannot guarantee the same or better returns in the future.
Diversify optimally
When choosing mutual funds, avoid investing all of your money in a single asset class or mutual fund product. Try to diversify your portfolio by investing across different mutual fund categories and in different systems within the same mutual fund category. Optimal diversification can help to largely reduce the investment risk.
Active vs. passive investment
With passive mutual fund investments, the fund manager follows the underlying index and the fund’s return will typically be the same as the returns of the underlying index. When actively investing in mutual funds, the fund manager is directly involved in defining the structure of the investment portfolio and the securities it contains. The expense and expense ratio of fund management is higher in an active investment fund than in a passive fund. So if you’re not looking for an aggressive return and just want to mimic the performance of an index like Nifty or Sensex, you can go for a passive fund. However, if you want to outperform the index and are willing to take a little more risk, you can go for active investing.
The author is the CEO of BankBazaar.com
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