It is important for people of all working ages to save some money for their retirement needs. Investment has always been a fascinating subject. Investors need to set broad Investment Goals to make money. But before investing your hard-earned money, you need to take into consideration several factors. It includes budgeting abilities, risk tolerance and personal financial objectives.
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Factors to understand when investing in Mutual Funds (MF)
1. Risk factor:
MF offers investors with benefits like diversification and value for money. However, it also carries certain risks. To reduce risks, it will be necessary to gain in-depth knowledge about such type of fund and identify appropriate strategies to mitigate them. Some risk factors that could contribute towards factors that affect your investment decision are:
1. Liquidity Risk:
It is related to MFs such as ELSS. The reason is because it has lengthy lock-in period and is rigid\ and is not suited to those with less Risk Tolerance. Such risks indicate that investors may face trouble to make profits when trying to sell off their investments.
2. Market risk:
Certain events including those involving companies directly with fund-owned scripts may have the potentiality to reduce MF script generated income and prices. Internet rate and currency changes, global or regional economic instability combined with market and economic conditions are few factors.
3. Credit Risk:
Credit risk in MF investments might arise in certain circumstances where scheme issuer is unable to make promised interest payments. You need to discuss with the Product manager to know what is good for you. But personal research will be an absolute necessity.
2. Liquidity factor:
It is another vital factor that tends to influence investment decisions. Liquidity is referred to how easily assets like debentures and equity shares, etc. can get exchanged in the stock market against money. Certain factors determine successful stock conversions. It includes bid-ask spread on market shares, book value of the company, etc. Again high liquidity risk will mean it is tough to buy/sell a particular security in the stock market. It might be due to the current liability of the issuing company might make it tough to satisfy. This is caused by reduced cash flow. The two types of risks that a certified product manager can let you know:
1. Market liquidity risks:
It addresses those systematic elements that arise from market volatility and connected with market investments.
2. Funding liquidity risk:
These are associated with intrinsic values of the company. It also reflects the company’s ability to pay off all its short-term debt combined with operating cash flows. Hence, those with high Risk Tolerance should avail it.
3. Uniformity factor:
A sustainable MF is considered to be one that manages to outperform consistently its benchmark in the long term. ‘Alpha’ is the excess term return as it exceeds set benchmark. Remember, you will be investing your hard-earned money. The fund needs to surpass the set benchmark to generate higher alpha. It is perhaps the first parameter to use. Equally vital is fund performance. It is to be accounted for some time to ensure investment experiences numerous market cycles. Thus, you can make steady returns with time and achieve your Investment Goals.
4. Return factor quality:
If you consider high return MF to invest in, ten ensure return is both steady and high. Avoid those that have offered high returns off-late. Returns consistency and quality is of great importance.
Thus, if you want to earn additional income from Mutual Funds, then you need to be aware of the above factors. If you still feel confused, then you should contact the industry experts for proper guidance.