We invest in mutual funds because they help us earn higher returns and achieve our goals. When choosing the right mutual fund for oneself, people often look at the returns that have been earned by the particular mutual fund in the past few years.
Focusing only on returns might not be a good idea when choosing the right mutual fund for you. There are several other factors that make up a good mutual fund scheme, and here’s why you shouldn’t solely chase returns.
According to data from the Association of Mutual Funds in India (AMFI), asset management companies added more than 51 lakh investor accounts in the June 2022 quarter. This brings the total investor accounts to over 13.46 crore.
So many new investors are investing in mutual funds every day but what is driving this rise? Increasing mutual fund (MF) knowledge, strong distribution channels, and simplified transaction process because of digitization have led to a jump in investor accounts.
Unlike their parents, who chose traditional instruments, such as fixed deposits, recurring deposits, and physical gold, the younger generation is choosing mutual funds, stocks, ETFs, and cryptocurrencies.
When choosing the right mutual fund, many investors think that they should choose the fund that offers higher returns. However, this may not work all the time. Past returns might not guarantee returns in the future.
Apart from this, there are several other reasons why you shouldn’t chase returns.
Risk & Returns
Mutual funds that give higher returns usually have a higher risk as well. That’s how the world of investments works – The higher the risk, the higher the returns, and vice versa.
Before you choose a mutual fund, you should know how much risk you are taking and whether you are comfortable taking that risk.
Risky mutual funds are not suitable as a short-term investment option. If you are staying invested for the long term you can consider high-risk funds.
So, while focusing on higher returns, you shouldn’t lose focus on your own risk tolerance and investment horizon.
Volatility & Returns
We all know that if you wish to earn higher returns, you would need to invest in equity mutual funds. But you should keep in mind that some mutual funds may suddenly perform well for a very short period of time. Sometimes, people may invest in mutual funds because the fund made 50% returns in the last year. But this might be a temporary thing.
The same fund might see negative returns later. Many newbie investors start investing in such funds simply because they showed very high returns and not assessing whether the fund strategy is in line with their goals and objective.
Sometimes, funds may perform remarkably well during a short period of time but they might not perform well in the long run. So, before you choose a fund, don’t be tempted by its recent returns but take a look at other factors, such as the fund’s holdings, the fund manager’s experience, and the fund’s investment strategy.
What Should You Consider Before Choosing The Right Mutual Fund For You?
There are several things you should keep in mind when you are considering investing in mutual funds.
1. Consistency In Returns
You might think that we are contradicting ourselves but it is important to look at the returns before choosing the right fund. However, you should make sure that the fund is giving returns consistently during several market cycles. Don’t invest in mutual funds that have given very high returns recently but have otherwise not given good returns.
The next important thing you need to consider while choosing the right mutual fund for you is the liquidity of the mutual fund. If you need access to your money all the time, you cannot choose a fund that has a lock-in period (i.e.) ELSS funds that come with a 3-year lock-in period. So, choosing liquid funds would be a better choice to park your idle money.
If you are investing in equity mutual funds, you should make sure that you have a long-term investment horizon and wouldn’t require your money immediately. So, before you choose a fund, see whether the fund suits your investment horizon and whether it is liquid enough to suit your needs.
3. Risk Tolerance
The mutual funds you choose to invest in should match your risk tolerance. If you are comfortable with taking high risks, you can consider investing in MidCap or SmallCap mutual funds. On the other hand, if you are someone who is looking for stable returns, you can consider investing in debt mutual funds. Always know your risk tolerance before investing in mutual funds because this will help you choose the right one.
4. Your Goals
This is an obvious one. The mutual fund that you choose should help you achieve your investment goals because, at the end of the day, we are investing to fulfill our dreams. If you have long-term goals such as your child’s education, marriage, and retirement, you can create a portfolio that has a bigger allocation towards equity mutual funds. If you have short-term goals such as a vacation, buying a new gadget, and more, you can consider investing in multi-cap mutual funds.
5. Fund Manager’s Experience
A fund’s success largely depends on the fund manager’s experience. The experience and expertise of a fund manager will help investors earn higher returns. Fund managers need to actively look out for opportunities to diversify the portfolio to reduce risk and align with investment goals. If you wish to receive all the benefits, you should assess the past performance of the fund manager.
In The End…
Mutual funds are a great investment tool if you wish to achieve your goals and secure your future. Choosing the right mutual fund schemes for you and creating a good investment portfolio might sound like a difficult task. However, if you know your investment goals, risk tolerance, and investment horizon clearly, you can invest in funds that suit your financial needs without any hassle.
Focusing solely on returns might lead you to choose funds that may not suit your investment needs. So, it is important to look at several other factors, including your risk tolerance, the fund manager’s experience and so much more. Don’t chase returns when it comes to investing in mutual funds and you should always make informed investment decisions.
We hope this article helped you understand more about mutual funds and how you can choose the right fund for yourself. If you wish to learn more about other personal finance topics, such as budgeting, managing your money, and improving your financial skills, head over to our Blogs section. If you wish to learn about different investment instruments, including Mutual Funds, Fixed Deposits, Digital Gold, and Smart Deposits, you can check the details blogs on our website.
All geared up to start investing? Create an account with Koshex within just 60 seconds, without any paperwork. Apart from Mutual Funds, you can also invest in Smart Deposits, Digital Gold, Fixed Deposits, and more, through your Koshex Account. You can also track your expenses, build a budget, invest in hyper-personalized investment recommendations, monitor your investments, stay on top of your savings goals, and more with Koshex.
We are truly built for every aspiring & experienced Indian investor. Sign up for free today.