Mutual funds are deemed a preferred mode of investment, where they can grow faster than a bank account. One can choose to invest their money into mutual funds to own a small piece of major listed companies of the Indian stock market, but before investing your hard-earned money, what are the questions you should be asking? Here are a few things to keep in mind before investing.
Lump Sum Or SIPs
When you invest money in any mutual fund, it allows you two modes of investment. One is lumpsum or one time, while another mode is a Systematic Investment Plan (SIP). In lumpsum mode, you invest a lump sum amount in one go. However, SIP is a more disciplined approach to investing. You have to set a date upon which money from your account will be deducted, and you’ll receive mutual fund units. Some exclusive mutual fund schemes only take SIPs to maintain constant inflow.
The mutual fund manager is the head of the team of analysts who deploys the capital collected from retail investors who choose to invest in their fund. These analysts track the financial market and invest in companies with long-term and short-term goals. Therefore, reviewing the fund manager's track record and checking how his previous funds have performed and how much return the funds generated during the fund manager's tenure is beneficial.
Direct vs Regular Plan
Suppose you know how to research the stock market and can identify funds that can perform well under certain market conditions. In that case, you should go for the direct plan, as the expense ratio of this plan is lower than the regular plan bought through a financial advisor or broker. However, if you cannot decide and track on your own, it is a good idea to take the help of financial advisors.
The expense ratio is a charge levied by the mutual fund house for managing your funds. This small percentage usually starts from 0.10 per cent and sometimes goes as high as 2.5 per cent. Passive funds, which follow a benchmark index, have low expense ratios. On the other hand, actively managed funds, where the fund manager actively picks stocks to outperform the index, have higher expense ratios to cover the cost of managing the funds.
Growth/Regular vs IDCW Plan
The growth plan invests the dividends earned from the stocks back into the mutual fund. So you’ll have to sell the mutual fund units to get money from this mutual fund option. If you choose to invest in an income distribution cum withdrawal (IDCW) plan, you can choose to receive monthly, weekly, quarterly or yearly payouts, but IDCW’s net asset value (NAV) moves slowly compared to the growth plan because the growth plans reinvest the dividend money back into the fund to buy more stocks.