Making the Right Choice : Mutual Funds

Everyone wants to earn an extra buck and most turn to the stock markets for the answer. However, apart from some diligent and persevering individuals, many a prospective investor find themselves lacking in resources, time or the knowledge to emerge successful. For such individuals, Mutual Funds (MFs) are the best option as they provide variety, flexibility, liquidity, diversification and tax benefits. However, it is not a random choice but proper selection and good monitoring of MFs that are crucial in fulfilling an investor's aspirations.

Long term objectives and Mutual Funds

It is not necessary that an investor should begin by saving huge sums of money from an early age with the aim to retire financially sound. Even if small amounts are invested through MFs and saved consistently over a period of time can, build up a decent sum to help one meet needs. Besides helping build capital for use in old age through investment programmes, MFs are also the perfect instruments for allocating assets and rebalancing so that the right level of risk is maintained all the time.

Determining risk tolerance:

An investor should be aware that the markets are always volatile. He should consider in earnest the effects of possible losses or potential gains. The 'comfort level' in risk tolerance should also be determined and if the investor is not confident with a particular level, he should select a different one.

Effective diversification:

A person should always comply with the principles of effective diversification, or the manner in which investment assets should be diversified among different fund categories to ensure gains and a mitigation of overall portfolio risk.

Are award-winning funds ideal choices?

This is a mistake many investors make when investing in mutual funds. It is the criteria for choosing winners that are more important than the awards themselves. Criteria for selecting winners may be a fund's consistent performance, risk adjusted returns, total returns and capital protection. These factors are very crucial and are significant for different categories. But their significance levels vary among individual investors. For instance, a Mutual Fund can yield very impressive total returns over a time period, but it can be highly volatile at the same time, something which an investor indisposed to risk will find difficult to cope with. Therefore, an investor should first decide which criteria he values the most and then consider the remaining elements.

An investor should also consider the track record of a fund against similar funds. Once he finds funds that suit him best, he should select them according to his asset allocation. Just a handful of carefully picked funds, but rightly monitored and managed, are enough for individuals to emerge as successful investors.

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