Key Tips for Budding Mutual Fund Investors

Posted On Monday, Apr 03, 2017


Question: What is as free and as abundant as air?
Answer: Advice!

After oxygen, the next free quantity seems to be – advice. From Virat Kohli’s batting to Trump’s hairstyle, we have our opinions on everything…especially investments. Free advice is the most harmful element especially if it is associated with investment decisions.

In this world, where you have information on your fingertips, you can avail of many options for investments and savings. However, selecting the best investment option is still a tough decision.

In recent times, investments in mutual fund is one of the most popular choices. If we consider numbers then we must say investment in mutual funds is growing rapidly. The assets managed by the mutual fund industry expanded by 41.7 % from Rs12.6 lakh crore at the end of February 2016, to Rs.17.9 lakh crore in February 2017, according to data from the Association of Mutual Funds in India (AMFI)*.

As an investor, you have many fund houses and different types of funds available for investment. But you must know the basic facts before investing in a fund. This information will help you to choose the fund best suitable to meet your investment goal.

1.Fund Philosophy - A set of guiding principles that inform and shape an individual's investment decision-making process is termed as the philosophy of the fund. The fund house's investment philosophy plays an important role in determining the performance of its funds.
2.Fund sponsor of the fund house - Fund sponsors are institutions who think of starting a mutual fund house. They approach the capital market regulator - Securities and Exchange Board of India (SEBI), SEBI then provides them the required approvals to enter the mutual fund business (after having ascertained their credentials). You must know who is the sponsor of the fund. Generally it is a major driver behind all key decisions, like set up the AMC, etc.
3.Experience of the fund management team - Trustees assign the job of managing investors' money to the Asset Management Company (AMC), and the fund manager is a person who takes investment decisions based on his/her professional skills, experience, and fund philosophy. Fund performance is closely connected to the fund manager and his/her ability in selecting a best stock on behalf of investor. The greater the experience of the Fund Manager, the better.
4.Track record of the fund - When investing in a mutual fund scheme of a fund house, one needs to keep in mind the track record or performance managed by a fund manager. A track record of a fund, across different market cycles, gives investors an insight about the fund's performance during bull and bear runs. The track record of a fund can be assessed any time, however an investor can check the performance of an equity fund after 5 years of investment. Generally, 5 to 10 years is considered as a long term investment period for investing in equities.
5.Expense ratio - An Asset Management Company that spends on the upkeep of a mutual fund is measured as the expense ratio of a fund. The fees of the advisor, recordkeeping, legal expenses, accounting, auditing fees etc. are what make up an expense ratio. When a portfolio is churned by a fund manager, he pays brokerage which is then ultimately borne by the investor in the form of an expense ratio. Higher churning leads to higher risks but at the same time, it is an expense borne by the investor. Therefore, lower the Expense Ratio the better.
6.NAV - NAV or Net Asset Value is the value per share of a mutual fund on a specific date or time. NAV per unit is calculated daily on the closing market prices of the securities in the fund’s portfolio. It helps an investor to determine the market value of the investment.
7.The Tax Implications - Any returns earned from mutual funds are taxed under the head 'Income from Capital Gains.' Capital gains in mutual funds, is the profit that an investor earns when they sell their mutual fund units. Capital gains or profits can be differentiated into two types. Long-term capital gains and short-term capital gains. The profits of a unit held longer than 12 months is called as long-term capital gains and there is no tax on such profits earned. Short-term capital gains on the other hand are taxable as the holding period of those units would have been 12 months or less. The above rule is applicable for equity funds; however debt funds have a different capital gain structure. Short-term capital gains (if exit is within 3 years) on debt funds will be added to your income and taxed as per your applicable tax slab. If you invest for more than 3 years, it is considered as long-term capital gains.
8.How often to review fund performance - Equities that are held for a long period of time are viewed as opportunities to be added to the portfolio. An investor can view the fund’s performance over different market cycles. Past performance is important in examining a mutual fund. But past performance may or may not be sustained in future and therefore an investor should not view that as the only parameter when selecting a mutual fund that fits his/her needs. In case of investment in debt funds, one should review the performance of the fund after change in the interest rates by the Central Bank, in case of India, its Reserve Bank of India (RBI).
9.Regular vs. Direct Plan- Simply, regular plans are sold by distributors and they receive commission on the same. In case of direct plans, there are no commission payouts both options are available for investors in the market and it’s always an individual choice whether to take assistance from the distributors or invest based on one’s own homework and understanding of numbers.
10.Factsheets - Last but not the least, factsheets are the documents which provides all the information about the fund house, fund managers and performance of the fund. It has information included for all the data points (and many more) discussed above. Apart from factsheet, investors can consider portfolio updates, latest updates, news available on the fund website which is helpful to understand the fund performance and other necessary updates like appointment of a new fund manager.

To conclude, these are the most important features that you must know. Above all, on individual basis, you need to consider your age, income, financial responsibilities and short / long term investment goals before making any investment decisions.

There are many other factors to consider, apart from the discussed above. You are advised to consult your financial advisor before taking an investment decision.

Source -

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – to read scheme specific risk factors.

Above article is authored by Quantum.

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