Introduced in India in the early-1960s, over the years, mutual fund plans have grown to become one of the preferred investment schemes amongst middle-class professionals in India. Amongst the numerous reasons why people consider setting aside a portion of their income for investment is that it can help them in acquiring long-term wealth. A reason why people aim to acquire long-term wealth is to use it for everyday expenditures after retirement. One of the several investment options that you can consider signing up for to generate long-term wealth is a mutual fund scheme.
Even though these schemes are popular, people are still usually known for having a lot of misconceptions about mutual fund schemes. Despite their popularity in recent years, a lot of investors still don’t know how to judge mutual fund schemes. Regardless of whether you are investing in mutual funds for wealth creation or capital preservation, opting to sign up for the right type of mutual fund scheme is vital for achieving your investment objective. So, another question after “what are mutual funds?” is “Are there any parameters for analysing a mutual fund scheme?” Listed below are some of those parameters that you can check before signing up for a mutual fund scheme:
- Looking up whether the fund is offered through a regular plan or a direct plan:
Before you opt to sign up for a mutual fund scheme, you must check whether the mutual fund offered by the AMC can be bought through a regular plan or a direct plan. In a regular plan, you are required to pay commissions to brokers or distributors. So, if you were to sign up for your mutual fund scheme through a regular plan it is important to make note of the fact that you will be enjoying lower returns against your investment options and financial planning. That’s because you are required to pay commissions in regular plans. As time passes, whenever your investment cost increases, the return you make on the investment decreases. Conversely, direct plans are known for working in the opposite way of regular plans. When you choose the option to sign up for a mutual fund scheme directly from an asset management company (AMC) it is referred to as a direct plan. In firm contrast to regular plans, professionals like brokers, agents, or other intermediaries don’t play any role in direct plans.
- Scrutinise the assets under management (AUM):
The asset under management or AUM is known for serving as a sign of the market value of all the investments that a mutual fund scheme is holding on to on its clients’ behalf. Generally, a lot of investors believe that while analysing a debt mutual fund scheme, a high AUM is usually considered a good indicator. A high AUM is a sign that the fund comes with a better investment inflow. Moreover, if a situation ever arises when you are thinking of withdrawing your money, a high AUM doesn’t put redemption pressure on the fund thanks to its larger size. On the other hand, when it comes to equity mutual funds and SIP, a smaller AUM is preferred and even recommended. A high AUM is especially preferred in the cases of a mid-cap or small-cap mutual fund. Simultaneously, it is also important to make note of the fact that you shouldn’t unceasingly target equity mutual funds that come with the lowest AUMs. That’s because they might come with higher operational costs per unit. Ideally, you should sign up for funds that have an average AUM. These mutual fund schemes can come with economies of scale without losing out on investment opportunities.
Apart from the two above, it is also prudent if you were to check on the fund manager’s records. In case you are still having doubts about the key parameters of mutual funds, get in touch with an investment advisor who is registered with the SEBI.