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6 Things to Know Before Investing in Mutual Funds

In our everyday life, whenever we decide to make a major purchase, say to buy an appliance, we do a detailed research, look at each component, and then pre-select what we will buy. This knowledge of what to expect from the product ensures that we have a good experience with what we buy.

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6 Things to Know Before Investing in Mutual Funds

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  1. 6 Things to Know Before Investing in Mutual Funds

  2. In our everyday life, whenever we decide to make a major purchase, say to buy an appliance, we do a detailed research, look at each component, and then pre-select what we will buy. This knowledge of what to expect from the product ensures that we have a good experience with what we buy. • The same goes for mutual funds. Before investing in them, you should know a few things that will ensure a rewarding investment experience. • In this blog we tell you the 6 things you should know before investing in Mutual Funds.

  3. 1. Different categories of mutual funds have different levels of risk. • The first and important point is that the risk of each category of mutual funds is different. A particular mutual fund category cannot be said to be high risk or low risk based on a common scale or common benchmark. Sure, if you invest in direct stocks, then equity mutual funds are low risk by comparison. But the risk associated with each category of mutual funds is different. • Therefore, before investing in any mutual fund, check the risk indicator for that particular mutual fund. Each scheme has a risk assigned, and you can see what risks you will take.

  4. 2. Direct plans offer higher returns • The second important point is that the expense ratio of direct plans is lower than that of regular plans. Because of this, Direct plans generate better returns compared to regular plans. • Now, some investors are under the impression that direct plans and regular plans of mutual fund investing online are different. That is not true. These are just plans for the same scheme. The only difference is that there is no intermediate agent or broker in the direct plans, so there is no commission or brokerage. This means lower fund house costs and ultimately a lower annual cost you must pay for your investments.

  5. 3. You won't get the same returns every year • Typically, when you hear mutual fund returns, they are annualized returns. This can give the impression that you will get the same returns every year. • Assume that the annualized return on a given online mutual fund scheme is 8%. That does not mean that you will earn 8% each year. That's because mutual fund returns aren't linear. For example, a mutual fund plan can give you a return of + 10% in the first year, while it can give you a -2% in the second year. There may also be periods without returns. Therefore, you must be prepared to see this variability in your annual returns.

  6. 4. Consistency of returns is a hallmark of good funds • A particular mutual fund scheme that gives a constant 10% return is better than a mutual fund scheme that has given + 17% return in the first year and -10% return in the second year. • Now, why is this consistency in performance important for NFO Investment? So that losses can be controlled and you have a higher chance of getting good returns. For example, a 5% drop in one year means that the fund has to generate a return of around 11% to cover the loss and give you a 5% return. For this reason, a consistent fund will generate better returns on a long-term annualized basis.

  7. 5. SIPs help create investment discipline • Automated investing through SIP not only helps teach discipline; they also help you profit from market volatility or you can start SIP online. That's because when the market goes down, you get more units for the same price. This helps you reduce your total investment cost. This is called the Average Rupee Cost, which can help you generate good returns in the long run.

  8. 6. Asset allocation and periodic rebalancing are crucial • Never keep your eggs in a basket is an adage. And this is also relevant when it comes to investing. Asset allocation is the process of dividing your investments into asset classes to reduce your portfolio risk. So before you start mutual fund investing, decide how much you will invest in different asset classes like stocks, gold, debt, etc., and then invest. • And while asset allocation is crucial, it won't be as beneficial as it could be with rebalancing. Rebalancing means that each time an asset class increases and its percentage in your portfolio increases, you record the gains and reinvest that money in other asset classes that are part of your portfolio.

  9. About Us • CAMS is a technology driven financial infrastructure and services provider to Mutual Funds and other financial institutions for over two decades.  As the market leading Registrar and Transfer Agency to the Indian Mutual Fund industry, CAMS serves ~ 70%* of the average assets under management - as of December 2020. We also provide technology enabled service solutions to Alternative Investment Funds and Insurance Companies. Besides serving as a B2B service partner, CAMS also serves customers through a variety of touch points such as pan-India network of service centres, white label call centre, online, mobile app and chatbot. • Website - https://new.camsonline.com/

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