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5 Vital Tips on Mutual Funds

Watch out for risks associated with Mutual Funds
Stay invested for longer period of time
Watch out for fees associated with Mutual Funds
Always consider tax implications of your investments
Low NAV doesn't mean cheap mutual fund

1. Watch out for risks associated with Mutual Funds

   Some types of mutual funds are more risky than others. Therefore, its important to know what the risks are and what your risk capacity is. Generally speaking, equity funds are the most risky. Debt funds are safer and money market funds are the safest. However, there is a relationship between risk and returns. Money market funds give you the lowest return because of their low risk. Equity funds will give you the chance of highest return to match their high risk.

   Some funds can balance their risks by investing in a combination of equity and debt instruments. The upside will not be as good as an equity fund, but the downside is protected because of the debt exposure in the fund.

   Always read the fund's offer document. Also, you should ask your agent about the kind of risks in the recommended fund.

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2. Stay invested for longer period of time

   You should invest for at least 3-5 year time horizon, if investing in an equity fund, otherwise you will not enjoy the full benefit of your equity exposure. Don't make the mistake of selling all your equity funds if the market corrects. By waiting for a 3 year period you will give yourself enough time to not only recover your losses, but also increase your returns.

   For debt funds, the duration of holding can be lower because your returns are capped by the interest that the debt securities will be paying the fund.

   For money market funds, these are funds that you should invest in for short-term liquidity or cash needs.

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3. Watch out for fees associated with Mutual Funds

   Entry load:

   Fees paid when you invest in a fund. As per the revised SEBI regulation, the entry load on all the mutual fund schemes has been abolished with effect from 1st August 2009

   Exit load:

   Fees charged when you sell your units. (Equity: 0.5% to 1% if withdrawn within one year, Nil if withdrawn after one year; Debt: Nil to 0.6% if withdrawn within one year, Nil if withdrawn after one year; Money Market: Nil)

   Annual management fees:

   Annual management fees paid to the asset management company. (Depending upon type of fund (equity or debt), these fees range between 1.0% and 2.5% of assets under management (AUM), depending on fund type and AUM in the fund)

   Annual management fees result in a lower NAV at the end of the year.

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4. Always consider tax implications of your investments

   Like other investments, mutual funds also have tax implications. Each time you sell your units or receive dividends, there could be a tax liability associated with such transactions. So, be careful about when you are exiting your investments as you might incur a cash outflow to the Income Tax Authority

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5. Low NAV doesn't mean cheap mutual fund

   It is a popular misconception that low mutual fund NAV means cheap fund and so a fund with a low NAV is better than a high NAV. For instance, many feel that Rs 10 NFO is a good fund to invest because you are getting it for cheap.

   On the contrary, a high NAV just means that the fund owns securities that have risen in value since the fund started investing in them.

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