Mutual funds are among the most popular investment options suitable for all types of investors – the new, the more experienced, and even those with in-depth market experience. You can create a mutual fund portfolio that aligns with your risk tolerance, financial goals, and investment period. However, it is advisable to invest in mutual funds for the long term to generate attractive returns. Short-term investments are subject to higher market volatility risks. You have time to overcome the market fluctuations and recover any losses in the long term. When investing for the long-term, there are some things you should consider to make an informed choice.
Here are the top five things to check in a mutual fund scheme for long-term gains:
1. Risk scale of the scheme:
If you want long-term mutual fund gains, it is best to invest in your risk tolerance. Each mutual fund scheme has a risk level. For instance, equity mutual funds carry a higher risk of market volatility than debt mutual funds. Hybrid mutual funds provide a balance of equity and debt investments, making them medium-risk investments. Choose the mutual funds that best match your needs depending on your risk appetite. If you want high long-term gains and can afford high risks, preferred equity mutual funds. Alternatively, if you are a low-risk investor, you can invest in debt or hybrid mutual funds.
2. Direct vs. regular scheme:
There are two mediums of investing in mutual funds. You can choose to invest online directly through the mutual fund house. These types of mutual funds are known as direct schemes. Direct mutual funds are beneficial for long-term gains because these funds are cost-effective and have a higher NAV (Net Asset Value), which translates to higher returns eventually. In direct mutual funds, you do not pay any commission or brokerage, unlike regular funds, where you pay commission to an intermediary for mutual fund investments.
3. The expense ratio of the scheme:
Each mutual fund scheme charges a management cost, the expense ratio. The expense ratio is the collective charge for management, administration, commission, selling and promotion, etc. Your expense ratio is expressed as an annualized percentage of your mutual fund scheme, disclosed daily in the form of NAV. This amount is payable to your fund manager every year from your mutual funds. The higher the expense ratio, the lower the mutual fund returns will be. Therefore, choose a fund with a low expense ratio for long-term gains.
4. Downside protection:
For long-term gains, your mutual fund scheme should offer growth but also provide downside protection. Downside protection helps evade the sharp fall in returns, which is usually evident during the initial investing years. You can assess the downside protection by evaluating how much the returns fall compared to the benchmark. Ideally, returns of a good sound mutual fund scheme should decline lesser than the benchmark during a market decline.
5. Consistency of returns:
When investing for long-term profits, choose mutual funds with a history of consistent returns. A consistent mutual fund assures reliable and market-plus returns. A scheme that delivers steady results will help you evade the risk of poor performance in the long term.
Focus on these five factors to select a viable mutual fund scheme that can potentially generate high long-term gains. You can use the Tata Capital Moneyfy app to compare mutual funds and make an informed investment decision. The Moneyfy app also helps you track, monitor, and manage your mutual fund investments.