Mutual Fund: 3 Factors you have to remember before plunging into it

Nearly $9 trillion was invested in ETFs and mutual funds in the past year. Most investor will keep this thing in mind before making investments in the mutual fund. However, there are some other factors which investors need to consider before investing in mutual funds in 2013.

1. Active managers: As per a recent study, more than 23 percentage of active managers defeated the market index in the last 10 years. Never ever think that it is because active managers help you get good profits and index funds. The study reveals that active managers’ fees drain a significant amount of investors’ profits. Active managers charge a fee of around 1.07 percent. In fact they made more money than the investors, who received 0.80 lower returns than index investors.

It shows that it is better for the investors to go for the passive index fund instead of working with the active managers. Investors have to make a comparison between their expenses and returns before reaching a decision.

2. Size of the funds: It has been found in a recent study that large funds perform better than the smaller funds. This is because of their low expense ratio. There are a great number of investors to cover the primary cost of managing funds. In case of the smaller funds, the bigger expense ratio lowers the profit margin of the investors.

mutual fund investment factors

Mutual Fund investment factors

3. Risks and profits: Most investors are too much interested in studying the past returns, but they just ignore the risks and profit potentiality of funds. If you invest in a volatile fund, then 2 things can happen. Firstly, you can make a lucrative profit. Secondly, you can lose all your money. If you’re not a seasoned investor and you don’t want to take risks, then it’s better you stay away from volatile funds. In such a situation, you can think about working with active managers rather than index managers. The reason is, active managers have controlled risks in an efficient manner in the past.

If you look at the figures of the last 10 years, active funds defeated the volatility of the index funds by around 1.96 percent. This implies that active managers can help you get the value of your money without taking too much risk.So, if you don’t want to take risk, then be prepared to pay less fees and get less returns.

There’s no doubt that investors must analyse the past track record before investing in mutual funds. However, investors should also consider the fund’s expense. Investors need to calculate how much they’ll get after paying the required fees. Other than that, investors must evaluate the volatility of funds, risks, profit potentiality, size of the funds, etc.

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