What to consider before investing in a mutual fund?

Mutual funds differ in terms of investment objectives, strategies, risks and costs. When choosing a mutual fund the following should be considered:

• Investment objective
• Risk profile of fund
• Your own risk profile
• Time horizon
• Fund manager report of funds
• Offering documents of funds
• Fees and expenses
• Tax consequences
• Past performance of the AMC/fund

Before selecting an appropriate category of mutual fund(s) for your savings, you must know your investment objectives. Your financial goals are determined by your level of income and expenses, financial independence, age, lifestyle, family commitments, among many other factors. Here are some questions that you should ask yourself and likely answers that will help guide you towards selecting an appropriate mutual fund.

1.   What are my investment objectives?

Likely answers: I need regular income; need to buy a home, finance a wedding; educate my children; or a combination of all these needs.

2.   How much risk can I tolerate?

Likely answers: I cannot afford to take any risk; or am willing to accept the fact that to earn long termgain there may be short term losses.

3.   What are my cash flow requirements?

Likely answers: I need a regular cash flow; or I want to grow my assets for the future, and do not need current cash flow; or I need a lump sum amount to meet a specificneed in the future.

4.   What is my time horizon?

Likely answers: I have a short term time horizon of less than one year; or medium term from one to five years; or long term from five to ten years.

By answering these questions you will have a clear idea about your expectations from your investment. This will help you determine an appropriate mutual fund investment strategy. Here are a few examples of possible investment choices based on your applicable time horizon:

• Long term horizon: If you are investing for the long term say five to ten years and want your money to grow, you should consider putting at least a portion of  your money in equity mutual funds.  A longer time horizon allows you to recover from a market downturn.
• Medium term horizon: Leaving your money invested for one to five years may not allow you to recover from market downturns. Youshould exercise caution and consider investing in balanced andincome funds.
• Short term horizon:  If you are investing for a year or less, there is very little time to recover from losses. You should only invest in mutual funds that have no restrictions on withdrawal s and focus on very low risk investments such as money market funds.

To help you plan your investment portfolio, basic characteristics of mutual funds in terms of fund category, investment time horizon, volatility/risk, and allowable investments are presented below: