Mutual Funds as long-term investment

Mutual Fund is a collection of money from many individual and corporate investors. This pool of money is managed by professional money managers for investment in market instruments. People who pool money to buy shares of a mutual fund are its owners or shareholders (unit holders). Fund managers invest this money to buy securities such as stocks and bonds. A mutual fund can make money from its securities in two ways: a security can pay dividends or interest to the fund or a security can rise in value. Advantages of investing in mutual funds include professional management of funds, securities research, investment diversification, variety, liquidity, affordability, convenience, government regulation etc. On the other hand, disadvantages of investing in mutual funds include payment of charges regardless of fund's performance, lack of control on investments made by fund managers etc.

Making investment decisions

It is very important to identify the financial needs and goals before making investment decisions. Financial needs/goals could be short/medium term goals like planning for a vacation, creating an emergency fund etc and long term goals like child's education, retirement planning etc. Identifying your financial needs and goals helps in selecting the investment instruments and quantum of investment. These are some general points that investors could keep in their mind while planning for investment portfolio. Don't put all the eggs in one basket. Look for diversification of your investment instruments Since the markets are volatile in short term, it is not possible to time the market (entry at lowest point and exit at highest point). Always have realistic expectations about investment performance. Try to understand why a fund has capability to outperform. The reasons could be due to sector of investments, or experienced fund managers. Remember that the past performances of the instrument may not be repeated. Consider the fees/loads and taxes applicable on the investment. It's not always advisable to invest in a new mutual fund as they have no or limited track record. Beware of a salesperson who tells you to invest in Mutual Fund IPO and that it is at par (zero premiums).

Investment Review

Although the investment in Mutual Fund is termed as Passive investment yet the investors are required to review their performances on regular basis (at least once in three month). These are the things that investors should keep in mind while reviewing the performance of a mutual fund and making exit decisions Always check the fund's total return. This is easily available in the Mutual Fund's periodic reports, websites and in various business magazines/newspaper Investors can also compare the Mutual Fund return with some benchmark index, but while comparing mutual fund performance with that of an index (Large cap Mutual funds vs Nifty or BSE Sensex, mid cap Mutual fund vs BSE 200 or BSE 500), remember that your fund's performance is calculated after fees and expenses have been deducted; the performance of the index does not reflect the costs associated with constructing and maintaining an identical portfolio. It is not advisable to compare one mutual fund directly with another. Every Mutual Fund invests based on certain focus e.g. Blue Chip funds invest only in big companies which has established track record. Mid cap mutual funds invests in mid cap (medium to small) companies and hence they are on the upper end of Risk-Reward matrix. Similarly there can be funds which are sector based e.g. Information Technology funds, Infrastructure funds etc. Usually in short term market rallies, some sectors do well and others do not and therefore investors should not switch out of their Mutual Funds investment based on short term performances of mutual funds. Avoid frequent switching from one fund to another. Switching from one fund to another involves transaction cost and that will reduce your profits. However, if a fund is consistently underperforming then it is advisable to switch your funds to other instruments.