To attain financial stability, it is important to invest your hard-earned money at the right time
and in the right investment. Lately, Mutual funds has become quite popular among younger
generation due to their lucrative returns. But before investing in mutual fund, one must
understand few basic things that can help individual in gaining better returns by assessing
the risk and reward ratio. In this blog, we will be going to put some limelight on the factors
that every investor must well aware of before putting their money in mutual fund.
Expense ratios of Mutual Funds
The expense ratio is a percentage that represents the amount of money
you pay the AMC as a fee for managing your investments. It is the annual cost of managing
and maintaining an investment fund. A lower expense ratio is generally preferable because it
indicates lower costs for investors.
Exit load
Exit load is a fee levied by mutual fund firms if investors withdraw a scheme
partially or completely within certain periods of time from the date of investment. It is also
known as commissions paid to fund houses or the exit penalty if an investor exits the fund
during the lock-in period. To avoid incurring exit loads on mutual funds, investors should stick
to the minimum holding period stated by the scheme. Mutual fund schemes typically levy exit
loads if an investor withdraws from the fund within a year.
Risk Factors
Risk is often defined as uncertainty in an investment. Risk and volatility in a
mutual fund are quantified using alpha, beta, and standard deviation. Alpha measures a
fund’s performance in comparison to its benchmark index. If a fund’s alpha is greater than
0, it means that it is outperforming its underlying benchmark. Beta is a regularly used risk
indicator that assesses the relative volatility of a stocks in comparison to its benchmark.
Diversification
Diversification is an important factor in minimising risk in mutual fund
investments. It implies that one should not invest all of his money in one area or stock. It is
critical to diversify your risk by investing in several asset classes. This leads to higher
average yield returns. As a result, it reduces the negative impact of any failing stocks over
the entire portfolio.
Time Horizon-
The time horizon, also known as the investment time horizon, is the period of
time during which an investor remains invested in a plan. There are several mutual fund
schemes for different time horizons, such as long-term, short-term, and mid-term, and
investors must examine them accordingly.