Evaluation Criterion while buying a Mutual Fund

by Manshu on November 27, 2006

in Mutual Funds

There are various aspects that should be looked into before putting your money into the Mutual Funds.

First of all the prospectus or the offer document must be studied in detail before investing. Various aspects covered must include:

Main features of the scheme followed: A Mutual Fund offers various schemes that are categorized according to investment objectives and Maturity period. Open-ended scheme doesn’t have a fixed maturity period and investors can buy or sell shares at any time based on NAV that is declared on daily basis. This scheme offers the highest liquidity. However, a closed-ended scheme has a fixed maturity period of 5-7 years. Based on investment objective, a scheme can be classified as growth scheme, income scheme, or balanced scheme. An investor, depending on his finances, risk-taking capacity, age etc, can take up any of the offered schemes.

Entry or Exit Loads: Some Mutual Funds offer a sales charge or load, which is to be paid when shares are bought or redeemed. There are some funds with no sales charge; these are called No Load Funds. Before investing the funds must be checked for the load they charge. However, it is meaningful to pay a load if fund gives a better investment than No-Load fund.

Risk factors involved in investment: Mutual Funds do not guarantee sure returns. These returns are related to the functioning of these funds. Mutual Funds invest in deposits, shares and debentures. There is some amount of risk associated with investment. The percentage may vary according to the working of the company or different companies may fail to pay the interest or principal amount on their securities. Government might change the rules regarding certain industries thus directly affecting the mutual bonds – this factor must be kept in mind while investing particularly in Sector funds.

Initial issue operating cost: One must check up with the offer document of the mutual fund for initial operating cost

Recurring Expenses that are to be charged: Again before investing all the expenses that are to be paid again and again must be kept in mind.

History of Mutual Funds: The Company’s profile, its profits, portfolio and competence must be the first thing to check up before taking up an issue. Moreover if you are investing in one scheme of he mutual fund the track record of performance in other schemes launched must be checked up.

Type of Securities that the fund invests in: One must see to the bonds, debentures and other stock options that the mutual funds invest in. The market value of these securities must be considered before investing.

Professional qualification of the person handling the funds: The financial handler of mutual funds must be a professional with good experience in the particular field. It is his duty – what to buy, when to buy, keeping a close watch and when to sell off. Handling this collective investment is a major issue and must be given in safe hands.

Penalties, if any, to be imposed: The offer document of Mutual Funds must be read carefully for any kind of penalties imposed under any circumstances.

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