Friday, September 21, 2018

Comprehending how mutual fund works the easier way

by Dishika Baheti (writer), Jaipur, July 12, 2016

Credit: Dishika Baheti
Invest money systematically in mutual funds every month for long period of time to get high return.

The clients should be able to know that how mutual funds works then only it will become easier for them to invest in mutual funds .

All the people who invest in mutual funds or aspire to do so, face some hurdles associated with the offline method like detailed form filling, long queues for paying your installment, etc. These all can now be avoided with the help of an online investment process. The launch of an online mode by all the mutual fund companies has reduced the otherwise hectic procedure involved in investing. A rise was recorded in the number of unsatisfied clients due to misleading promotions and unclear trading practices by the agents. This was stimulating the clients away from investing as a result of widespread skepticism owing to the faulty practices and the unawareness about the working of the mutual funds. People do not know that how the mutual funds work and what is going on behind the scenes. Although now mutual fund’s online system is making investors more independent by providing a healthy investing environment, still the customer participation is not up to that level. In order to attract the clients towards investing in mutual funds, it is mandatory to give them the required knowledge about the working principles of a mutual fund.

Online investing option has made the process quite easier to deploy their money. Clients can easily choose the scheme, investment method and also calculate the investment amount easily with the help of online tools. But, clients should follow a set of standard rules in order to gain maximum profit from their invested sum.

How do the mutual funds work?
Adopting the online investment strategy undoubtedly imparts freedom to the investors, but a set of following steps should be followed so that the clients can take sound financial decisions.

How analyzing works in your favor?
Generally, people think over and over again even before buying a small FMCG product used in their routine life; then it is undoubtedly not possible to deploy your hard-earned money in unfamiliar schemes without exploring every minute detail about the plan. Earlier, it was quite difficult to assess the performance, but now it has become uncomplicated as everything is available online. The clients can get detailed information by browsing through various sites. Only after studying a fund’s record and its potential to make progress, the investment decision should be finalized. Thus, the foremost step towards success in investment is reviewing the company’s as well as scheme’s record to save yourself from getting indulged with wrong plans and hence cannot utilize their money optimally. Everyone might think that how the working is affected by the past performance. How mutual fund works is dependent on previous output it has given. If the performance is good, then the clients can expect it to provide better returns in the coming years as well.

How does risk ratio play a major role?
There is a tendency observed in the clients that their investment decisions are influenced by returns solely. Clients need to realize the fact that an appropriate investing decision should be taken considering the other factors along with returns. The ratio analysis and performance analysis are two different sides of the same coin. However, none can be ignored while selecting a scheme for investment. Risk ratio includes various factors like Alpha, Beta and Sharpe ratio.

  • Alpha It is the factor that evaluates the volatility of the fund. This means that the clients should evaluate the deviation that a scheme shows in the returns. The deviation is the difference in the actual and expected returns of any fund.
  • Beta It is used to measure the risk of a portfolio against the market as a whole. This implies the effect of market situations on each and every fund. For example, if the stock market trends up with 10%, the fund whose beta is 1.2% will show a hike of 12%. In a situation where the stock market is rising then, a client should prefer funds having a higher beta and vice versa.
  • Sharpe ratio It is the ratio which signifies the contrast between the risk taken and the returns generated by the fund. It shows that whether the returns have resulted due to smart investment strategy or the huge risk that has been taken by the fund managers.

The above three factors play a very crucial role in determining the working strategies of mutual funds. Whether it is alpha, beta or Sharpe ratio, all help in deciding how the mutual funds will actually work.

How can risk taking capacity affect your investment?
The clients need to determine the level up to which they can bear the risk. For example, a person who tends to attain capital appreciation would be ready to take up more risk as compared to the client who prefers a debt fund for investing his money. Therefore, your risk appetite will lead you towards selecting the correct fund. If the clients invest in risk-prone schemes, then the working strategy for them is different, and the working plan of debt funds is different. So it depends on the client’s capacity to which they can take the risk and how the mutual fund works rely on it solely.

Hence, if an investor follows all the steps associated with the selection process of a scheme, then he/she will surely reach the pinnacle of success over the time. Maximize your returns by choosing a fund which will coincide with your wants according to the points mentioned above.

About the Writer

Dishika Baheti is an active hand in providing advice to mutual fund investors. She has been reading the market moods and conducting analytical researches on mutual funds market for the last three years.
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