Things to look at before investing in mutual funds!

Usually, returns and ratings are the only things that people look at before investing in mutual funds. However, there are various other aspects that one should look at which are discussed in this article.

Generally, when you ask someone which is the best mutual fund to invest in, the quickest reply that comes is to invest in 'xyz' fund as this has given good returns and is also top-rated. However, returns or ratings which is a derivative of returns are just one aspect of it and that too is not forward-looking.

Remember, mutual funds do not guarantee past performance to carry on in future. So, never rely only on returns to make your investment decision. Therefore, to have a basic idea of how to select mutual funds, we have listed the top three factors that you need to look at before investing in mutual funds.

Time horizon

This is one of the most important factors that you need to consider before investing in mutual funds. There are a plethora of funds available that cater to different investment needs. Understanding your investment horizon will help you in selecting mutual funds better. Say, for instance, you need the money invested in the next three years and hence, it is pretty much clear that you need a short-term solution. So, here investing in equity would make no sense. In such cases, investing in debt mutual funds makes more sense.

Risk Profile

While investing in mutual funds or even stocks, the risk is the most underrated factor. No matter how bitter the risk is, it is the fact and investors should account for it while investing. Say if you are someone who cannot digest volatility, then having a higher allocation to small-cap funds or sectoral or thematic funds would make no sense. Large-cap index funds, large-cap funds, aggressive hybrid funds or balanced advantage funds are the ones that you need to consider.

Returns

Here comes your favourite part. Of course, it is important to look at returns as it will help you understand how the fund has performed. However, we believe that looking at returns in isolation is not the right thing to do. You should always look at returns along with other parameters. Even while looking at returns, trailing returns or point to point returns or absolute returns are the most preferred ones.

However, they fail to show you the right picture and are prone to recency bias. So, when you look at returns, seek rolling returns. Rolling returns gives you a better picture. This actually helps you understand considering your investment horizon what are the chances that you would earn expected returns.