Tips on Investing in Mutual Funds

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Millions of investors have come to rely on mutual funds as their primary investments. If you are thinking of investing in a mutual fund, you should remember that they are only one of the many types of investments and that, as with any investment, you should know and understand the nature and risks of mutual funds and options available to you before you invest any of your money.

You can earn money out of a fund in basically three ways. First, a fund may receive income in the form of dividends and interest on the securities it owns which it pays to its shareholders in the form of dividends. Second, the price of the securities a fund owns may increase. When a fund sells a security that has increased in price, the fund has a capital gain. At the end of the year, most funds distribute these capital gains (minus any capital losses) to investors. Third, if a fund does not sell but holds on to securities that have increased in price, the value of its shares (NAV) increases.

But before you invest it is better to do some background work. The following are some of the tips which are to be followed while investing in mutual funds :

Know Yourself :

Before you invest, decide whether the goals and risks of any fund you are considering are a good fit for you. You take risks when you invest in any mutual fund. You may lose some or all of the money you invest (your principal) because the securities held by a fund go up and down in value. What you earn on your investment also may go up or down.

Establish Your Benchmarks :

Be clear in how you will measure the performance of the fund. If it is a dedicated fund like say pharma, FMCG etc. then its performance can be measured only against those particular indices. A small cap fund‘s performance cannot be measured against the BSE Sensex performance. So be clear what is the profile of the fund and what will its performance be compared to.

Do Your Home Work :

There are sources of information that you should consult before you invest in mutual funds. The most important of these is the prospectus of the fund you are considering. The prospectus is the fund’s selling document contains information about costs, risks, past performance, and the fund’s investment goals. Request a prospectus and read the prospectus before you invest. The Annual Report of the fund is another source of information. Look at “fee table,” where the fund shows what it’s charging you. Also once you invest in a fund track it. If you have not recently examined the prospectus for a fund you own, you should monitor your investment by obtaining and reading the most recent prospectus. Careful reading of quarterly and annual reports is also necessary to keep up with changes in your investment.

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