Mutual funds are your one-stop shop for merely all the investment needs. Whether you want to save money for your child’s education or you want to save tax, mutual funds are the best investment vehicles to attain these goals. They offer everything that an investor seeks, such as ease and flexibility, withdrawals, low charges, diversification, transparency of investment, lower taxes and high regulation. A large number of people are aware of mutual funds, but prefer to stay away as most of them are not sure about how to pick the right fund. In order to invest in mutual funds, you need to understand certain types of mutual funds that are available, such as equity, debt, Hybrid or balanced, close-ended, open-ended and money market. Therefore, the below-mentioned steps will guide you on how to invest in mutual funds:

  1. Asset Allocation: The first thing you need to understand is what sort of portfolio you want. This is known as asset allocation. A perfect allocation helps you to invest in a number of funds that covers the asset class which aligns with your future requirements. Your asset allocation should be a healthy mixture of low risk and high risk components. Basically, the percentage of funds that you allocate to low risk debt instruments should always be equal to your age. According to this golden rule, the younger you are, the more you can invest in equities and high risk mutual funds.

 

  1. By shortlisting fund types: Shortlisting or zeroing in on the right mutual funds is the most important part of investing in mutual funds. Once you have done proper research with regard to asset allocation, the next step is to look through and compare different mutual funds on the basis of their investment philosophies and past performance. Moreover, before investing in mutual funds, you must at first be certain on what your financial goals are.

 

  1. Comparing funds: Once you have factored in the points mentioned above, you should be able to shortlist the funds. Here are a few tips that will help you pick the right funds:

 

  • While choosing the right mutual fund, you must check its past history from shareholder pattern or simply by checking the performance online.

 

  • Look for the top mutual funds in asset class that matches with your time frame, financial goals and risk profile.

 

  • You must check the performance of funds in different periods like 3 months, 6 months, 1 year, 2 year and so on.

 

  • The funds that feature on these lists denotes all-round performance and are most likely managed by exceptional fund managers.

 

  • Moreover, you must check for the profile of asset allocators and fund managers.

 

Therefore, the decision you take here will help you in making an informed decision that covers each and every aspect of your financial-decision making process.

Importance of diversification: Every investment that you make is risky at some level. Thus, with diversification you can minimize the potential losses. So, the best way to diversify your investment is by spreading your portfolio in order to include assets that are not fully correlated.