Mutual funds are considered the preferred form of investment as they can grow faster than bank accounts. One can choose to invest their money in mutual funds to own the top Indian stock market companies, but what questions should be asked before investing your hard earned money? Here are a few things to keep in mind before investing.
Lump Sum or SIPs
When you invest in any mutual fund, it allows you two types of investment. One is lumpsum or lump sum, the other mode is Strategic Investment Plan (SIP). In lumpsum mode you invest a lump sum amount at one time. However, SIP is a more disciplined approach to investing. You must determine the date on which funds will be deducted from your account and you will receive mutual fund units. Some special mutual fund schemes only take SIPs to maintain a steady stream of income.
Fund manager
A mutual fund manager is the head of a team of analysts who deploy the capital raised by retail investors if they choose to invest in their funds. These analysts track financial markets and invest in companies with long-term and short-term goals. Therefore, it is important to review the track record of the fund manager and how their previous funds have performed and how much return has been made during the time of the fund manager.
Direct vs standard plan
Let’s say you know how to research the stock market and can identify funds that may perform well in certain market conditions. In this case, you should go for the direct plan as the expense ratio of this plan is less than the regular plan purchased through a financial advisor or broker. However, if you are unable to decide and follow through on your own, it is best to take the help of financial advisors.
Cost ratio
The expense ratio is the fee charged by a mutual fund house for managing your money. This small percentage usually starts from 0.10 percent and sometimes reaches 2.5 percent. Passive funds that track a benchmark index have lower expense ratios. On the other hand, actively managed funds, where the fund manager actively selects stocks to outperform the index, have a higher expense ratio to cover the cost of managing the fund.
Growth/Regular vs IDCW Plan
The growth plan reinvests dividends from stocks into the mutual fund. So to get money from this mutual fund alternative, you will have to sell mutual fund units. If you choose to invest in an Income Distributing Cumulative Withdrawal (IDCW) plan, you can choose to receive monthly, weekly, quarterly or annual payments, but the Net Asset Value (NAV) of an IDCW moves slower compared to a growth plan because growth plans reinvest. Dividends are returned to the fund to purchase additional shares.