Investing in mutual funds is increasingly becoming a common choice among prospective investors. This is because investors are bestowed with an enormous number of perks. For starters, investors can begin investing within a minimum amount of just Rs. 500. Individuals do not necessarily need to have a Demat account for mutual funds. It further facilitates easy diversification of portfolios. However, an investor must have accurate knowledge about the best mutual funds to invest in to get the best returns on investment. 

Before we move on to how you can invest in the best mutual funds, you must know what exactly a mutual fund is and how it works. It is a kind of investment option where investments of a number of investors are collected. The collected funds are then invested in different types of investment instruments such as bonds, securities, equities and so on. Every investor owns a unit in the fund, that represents a part of the fund holdings. The income that is earned from the investment instrument is then equally allocated among all the investors after making a few deductions by computing the NAV or Net Asset Value of the scheme. 

Steps to follow to invest in the best mutual funds

There is no doubt that mutual funds are a lucrative investment option but choosing the best stock market mutual funds is only possible when you follow the right steps. Eminent brokers like LKP Securities can help you to choose the best mutual funds very easily. Besides that, you can also follow the comprehensive list of the most crucial steps given below that can help you to choose the right kind of mutual funds. 

Recognise your goals and risk appetite

Before putting your feet in the investment market, it is essential that you determine your aims and objectives for the investment. Figure out whether your objective is current income or durable capital gains. Examine the purpose that the returns will serve such as education fee, post-retirement funds, etc. The reasons can be many, but you need to be absolutely sure about it. Having a set goal will help you to choose wisely from the infinite number of mutual fund options available in the market. Besides having a goal, you must also have a risk appetite. You have to evaluate whether a conservative investment or an investment involving a lot of fluctuations suits you. Return and risk are directly proportional to one another, meaning the greater your risk appetite, the more returns you get and vice versa. 

Evaluate the time horizon

Another important factor that plays a role while investing in the best mutual funds in India is the duration of the investment. Evaluate the amount of time for which you want to hold an investment. While mulling over this, remember that mutual funds levy sales charges. Hence, investing for a short term can take away a big chunk from your returns. Thus you need to maintain a suitable investment period to earn significant revenue without having to give away too much. The ideal time horizon for mutual fund investment is a minimum of five years. 

Choose the fund type and style 

The principal objective behind mutual funds is capital gains. If your objective is to fulfill long-term requirements and you are ready to manage a significant amount of fluctuations and market risks, you must go for durable capital appreciation funds. A significant percentage of these kinds of fund’s assets are invested in the common stocks which makes it a risky investment option. However, since the risk is more, the expected returns are higher. The minimum time frame for these kinds of mutual funds is five years. However, you can expand the time horizon beyond this time frame if you are willing to earn exorbitant returns. One crucial aspect that you must keep in mind before investing in a capital appreciation fund is that you will not be receiving any dividends from these kinds of funds. 

If the idea behind the investment is regular returns, you can choose to invest in income funds. These kinds of mutual funds are invested in bonds such as corporate debt and government bonds that offer regular interests to the investors. You can either choose to invest for a long, short or medium-term. Moreover, income funds are less volatile in nature. Thus it can help you to diversify your stock market portfolio without any hassle. 

Evaluate the fees

The mutual funds firm earns money by imposing fees on the investor. Thus before choosing from the best mutual funds to invest in, you must evaluate the different kinds of costs involved. A few funds levy a sales charge called load which is either levied while purchasing or while selling the shares. These charges are levied to discourage investors from the selling and buying of shares frequently. There are different types of load fees such as front and back end fees, which is the highest during the initial year of the investment and diminishes with each passing year. Moreover, the front and back end load fee can be as high as 8.5%. Other than these two, there is also something called the level load fee and no-load fee. While the level load fee is levied annually, the no-load fee does not involve load charges, but includes other kinds of fees such as expense ratio which can be exorbitant. Hence, carefully peruse the fees involved while investing in a mutual fund.  

Identify whether you want an active fund or a passive fund

Identify whether you need a passively managed mutual fund or an actively managed mutual fund. The funds which are actively managed have certain portfolio managers. They decide on the securities and assets to be added to the fund. They carry out thorough research on company principles, economic factors, trends and assets while making the decisions related to investment. Active funds always surpass a benchmark index, based on the nature of the fund. The fees for active funds are substantially high. On the contrary, funds that are passively managed, commonly known as index funds, monitor and imitate a benchmark index’s performance. The fees involved in index funds are comparatively low as the turnover is quite less. More often than not, active funds fail to surpass the benchmark. Investors tend to choose passive funds although their performance is slightly below the benchmark as they fare far better than active funds and the fees too are quite low. 

Analyse the past results and the managers

Before making an investment, you must analyse the former performance results of the funds. To do so, you can ask certain questions.

• Were the results delivered by the manager in accordance with the results of the general market?

• How was the volatility of the fund? Was it greater than the major indexes?

• Was the turnover exceptionally high, which can levy high taxes and costs on the investor?

Assessing the answers to these specific questions will help you to analyse the performance of fund managers under certain specific circumstances and define the returns as well as turnover trends of the funds in the past. 

Check out the fund’s size

Try to keep the size of the fund moderate, meaning neither too big nor too small. It is easier to maintain the regular investment inflows conveniently if you choose stock market mutual funds that are smaller in size.