5 Important Factors to Weigh Before You Invest in Mutual Funds Online
Mitali Dhoke
Sep 13, 2022
Listen to 5 Important Factors to Weigh Before You Invest in Mutual Funds Online
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In the past few decades, mutual funds have become the preferred choice of investment for many investors in India. Thanks to technology, investment in mutual funds online has recently acquired significant traction. The ability to invest in mutual funds online, hassle-free, and from the comfort of your home, offers investors a major convenience. In recent times, many top-rated mutual funds have been offering attractive returns to investors. You should strongly consider including mutual funds with a long-term approach in your investment portfolio given the current market volatility to generate better risk-adjusted returns.
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In India, there are up to 44 Asset Management Companies (AMCs) that operate in the mutual fund industry and offer mutual fund schemes across various categories and sub-categories. Mutual Funds are one of the most sought-after investment schemes in India owing to the following advantages:
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Professional management - Investors who lack the time or expertise to conduct the necessary research and asset allocation are better off investing in professionally managed mutual funds.
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Liquidity - Fortunately, there is no lock-in period for the majority of mutual funds. It is considerably easier to purchase and sell a mutual fund unless you choose close-ended mutual funds.
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Portfolio diversification - A mutual fund allocates its entire investment among various asset classes and securities. This ensures diversification and spreads out the risk.
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Low-cost investment scheme - Mutual funds allow you to start investing with as little as Rs 500 via a Systematic Investment Plan (SIP). You can choose between SIP and lump sum investments based on your suitability.
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Tax-efficiency - Under Section 80C of the Income Tax Act, some mutual fund schemes provide tax advantages. For instance, Equity-linked savings schemes (ELSS), are also referred to as tax-saver funds.
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Many investors today favour online investment platforms over traditional investments made through brokers or distributors. Most investors prefer direct investment in mutual funds through the websites of asset management firms or fund houses, particularly tech-savvy millennials and Gen Z investors. Many fund houses have launched several user-friendly mobile applications to promote mutual funds. Investors can buy, sell, switch schemes, and perform various investment-related tasks through these investing apps or web portals.
[Read: How To Invest In Mutual Funds Online ]
While investment in mutual funds online attracts millions of investors, it is crucial to be fully aware of all the services the online investing app or web portal offers as well as any potential drawbacks and make an informed investment decision. In this article, we will discuss some important factors that investors should consider before investing in mutual funds online.
1. Ensure you select a secure online investment platform
There is a plethora of investing apps and several fund houses have launched direct mutual fund investment web portals. However, it is essential to select an investment platform that assists you to manage your investments wisely. You need to compare these online investment platforms on various parameters like user experience & onboarding, ease of access, fund screening tools (it helps you to select worthy mutual funds), investment performance data (mutual fund scheme's historical performance track record), availability of investment options (SIP/STP/SWP, lumpsum), value-added services (market information, news updates/alerts, etc.), robust back-end technology and effective customer support service, etc.
It is prudent to select an effective online investment platform, as it is the first step towards investing in mutual funds online. Usually, investment in mutual funds seems to be complex, but with the help of a user-friendly online investment platform, many novice investors who lack in-depth market knowledge can also invest in mutual funds wisely.
2. Different mutual fund categories have different risk levels
The second important point is that the risk of every mutual fund category is different. While selecting mutual funds online, you need to analyse the risk that a mutual fund scheme carries and does it suit your risk appetite. For instance, if you invest in direct equities, then, in its comparison, equity mutual funds have a lower risk. So, before we invest in any Mutual Fund, check the riskometer of that particular mutual fund, mutual fund investing apps and portals do mention this under the details of the scheme. Every scheme has a risk assigned to it, and you can see what risks you will be taking.
3. Direct Plans vs Regular Plans
When you select a mutual fund scheme online, you can invest via a regular plan or a direct plan. In the case of a regular plan your AMC or mutual fund house does pay a commission as distribution expense, whereas in the case of a direct plan, no such commission is paid.
The expense ratio of direct plans is less than regular plans, since mutual fund distributors are not involved in direct plan investments, the AMCs do not have to incur distribution expenses. As a result, Direct plans generate better returns in comparison to regular plans due to a low Total expense ratio (TER). The difference in TER between regular and direct plans varies from scheme to scheme and AMC to AMC, depending on the commission structure of AMCs. Online investment platforms of the AMCs / RTAs and transactions through mobile apps, have made transactions much simpler for investors who wish to invest in direct plans of mutual funds.
4. Mutual fund performance track record
Although past returns of a mutual fund scheme do not justify its future performance, it gives you an idea of how the fund has performed in the past during various market phases to make an informed decision. However, some of the mutual fund apps do not provide risk ratio inputs for investor's analysis while others are recommending funds based on last one-year performance only. Also, some of these investment platforms are not being updated regularly, the return from mutual fund plans is being highlighted for say 1 or 3 years despite the scheme's existence of over 5 years.
Thus, investors need to ensure that the online investment platform provides a reliable performance track record of a mutual fund scheme, at least past 10 years' historical data. This will assist you in prudently choosing the best mutual funds for your portfolio and tracking expected returns.
5. Robo-advisory services/ Customised portfolio services
While investing in mutual funds online through an investment platform, you need to ensure that it offers a customisable portfolio option. So you can plan your investment based on your risk profile, investment horizon and objectives. Some investing apps or portals dealing in direct mutual fund plans will be offering a more generalized investment service. So users looking for customized offerings will not be duly served.
On these apps, there can be seen heightened penetration of mutual fund schemes which owners of the app are promoting either as top funds or recommended portfolios. Further, it lacks quality research inputs and it fails to offer flexibility for novice investors who wish to select mutual fund schemes as per their risk profile. A new form of investment advisory has emerged - Robo-advisors. These online platforms investing in mutual funds use technology that runs complex algorithms to develop automated customised portfolio allocation and investment recommendations.
Robo-advisory is convenient, engaging, and simple to use. Robo-advisors help investors plan a mutual fund portfolio taking into account their suitability for the scheme. Under mutual funds, there are hundreds of plans available under different categories. A good and unbiased Robo-advisor will help you separate the wheat from the chaff.
You can simply manage your investment portfolio with the help of a Robo-advisor; it will assist you in selecting worthy investment options based on your risk tolerance and implement a systematic approach.
Although Robo-advisor will take care of your investments and offer you services with risk-adjusted returns, somehow, it will be necessary to enhance your financial knowledge as well. If you are financially literate it will assist you to better understand these important factors while investing in mutual funds online and make informed financial decisions.
PS: We at PersonalFN have an exclusive online platform PersonalFN Direct that offers Robo-advisory services for hassle-free mutual fund investments; it is a platform to access and invest in Direct plans of mutual funds. PersonalFN Direct offers you to invest in a ready mutual fund portfolio based on your risk profile, which is strategically designed by our research team to suit your investment needs. It offers single-point access to help you with investing and tracking your transactions with different AMCs.
So what are you waiting for, begin your mutual fund investments online with PersonalFN Direct now!
Happy Investing!
Warm Regards,
Mitali Dhoke
Research Analyst