Mutual funds help in simplifying the task of investing. But the main difficulty lies in fact there are above 2000 fund schemes. Choosing one amongst them is a daunting task. There are four significant decision points that you will come across. We are here to help you out in making an informed decision.
- Regular plan or direct plan: Mutual fund offers the option of a regular plan and a direct plan. When you are buying a fund from a distributor, we call it as a regular plan. Suppose you are buying the fund directly from the fund house, and there is no intermediary in between. We call it the direct plan.
If we compare their underlying portfolios, then the two will be similar. But they vary according to the expenses. A direct plan has a lower level of annual expenses because there is no commission or distributor fee. It is true that you will be able to save money because of a direct plan. It will also give you higher returns. But you have to handle everything by yourself only. You will be performing as a do-it-yourself investor. So you have to rebalance, switch funds, actively track your portfolio all by yourself. If you are a beginner, this will be quite daunting for you. So, in the initial stage, it is advisable to take the help of a distributor and thereby invest in regular plans. With time, you will gradually gain confidence in making investments. So you can consider switching to direct plans.
- Equity fund or debt fund: First of all, you have to make up your mind regarding investment in an equity fund or debt fund. They both serve different purposes and cater to varied needs. Debt funds provide investors with a steady but lower level of returns. Because of the low return profile or low risk, debt funds are ideal for meeting your short term goals. Here capital preservation gets precedence over the potential of returns.
Equity mutual funds make investments in shares. So it is capable of earning far higher returns. But the disadvantage is that it can fluctuate in the short term. Equity mutual funds are ideal for long term plans. If you incur losses from equity investments, then it can have drastic impacts on longer investment horizons.
If you are an amateur in the field of investments, then balanced funds will be an ideal option for you. As per these funds, you can invest 65%of the money in equity and the rest of the amount in debt. Because of this perfect combination, you will be getting an apt exposure to equity investments. The debt portion of the investment brings the element of stability to your returns.
- Open-end funds or Closed-end funds: An open-end fund is the one that is available for purchase and sale purposes in continuity mode. They do not have a specific or fixed maturity period. It is quite convenient for the investors to buy and sell the units of open-ended funds, according to the NAV or net asset value. This gets declared daily.
If we consider a closed-end fund, then we have to keep in mind that it is available for subscription only during a particular period, right after the NFO or new fund offer. Usually, an investor will not be able to redeem his units before the maturity of the closed-end fund. But, in order to provide a platform o the investors to allow them to exit before the end of the term, fund houses tend to enlist the schemes of their closed-end schemes on a stock exchange. However, due to the low trading volume of these funds, investors find it challenging to exit through this route. Even if there is a buyer, the fund tries to trade at a discount to its NAV.
Dividend option and growth option: Funds bring along the option of dividend as well as growth. An investor will be getting regular dividends from the dividend options. But the growth options do not provide any such payout facility.
Fund dividends are just a part of returned investment money. After the payment of dividend, the NAV of the fund gets adjusted downwards. If there is no need to possess a part of your returned money, then it is better to choose the growth option. Because of this, the value of fund returns gets higher. Also, the dividends that you will receive can be invested again at lower rates