Top Things to Know Before You Start Mutual Fund Investment

Mutual funds are a popular choice among investors because of the advantages they offer. From convenience and diversification to lower costs and risks (as the funds are managed by experienced fund managers), the investors get many advantages with mutual funds. However, there are a few things associated with mutual fund investments that every investor should know before they start investing in a mutual fund.

Let’s explore further in detail about mutual fund investments, the benefits they offer, and the things you should know before investing in mutual funds.

What Are Mutual Fund Investments?

Mutual funds pool money from multiple investors and allocate it to a diversified portfolio of stocks, bonds, and other money market instruments. These funds are managed by AMC (Asset Management Company) professionals on behalf of their investors. The profit or loss incurred is shared with the investors in proportion to their investments.

Benefits of Investing in Mutual Funds

From professional investment management to efficient portfolio diversification, investing in mutual funds can be rewarding in many ways.

Some of the benefits of investing in mutual funds can be as follows:

With mutual funds, you get access to a professional fund manager who makes the research-based decisions about how and where to invest your money for maximum benefits.

Mutual funds (except for some, like close-ended funds or ELSS) are generally highly liquid, meaning they can be easily redeemed anytime. You can very easily sell the units and redeem your money, which gets transferred to your bank account within a few days.

Efficient portfolio diversification is another key benefit of investing in mutual funds, as your funds are managed by an expert.

Things You Must Know Before Investing in Mutual Funds

Returns Are Not Always Consistent

While mutual funds offer potential for higher returns, these returns may not be consistent and can fluctuate based on market conditions. This means mutual funds do not guarantee a consistent return every year. Market fluctuations like the recent market crash of 2025 can significantly cause most of the fund’s value to deliver negative returns.

So, considering the market conditions or understanding market dynamics and their impact on the funds is a crucial factor to know before investing in a mutual fund.

Expense Ratio

The expense ratio in a mutual fund is the annual operating cost or expenses incurred by the AMC to manage the fund. This generally includes the fees of the fund manager, marketing and distribution expenses, legal or audit costs, etc.

Expense Ratio Formula:

Expense Ratio = (Total Operating Expenses/Average Asset Under Management) x 100

Where,

Operating Expense = Total Cost incurred by AMC

Asset Under Management (AUM) = Total value of all the investments

For example, if you are investing ₹10,000 in a mutual fund and the expense ratio is 3%, then 10,000*3%/365=0.82 will be deducted every day from your investment value. The expense ratio is charged on a daily basis, ensuring that you only pay for the time your funds are invested. Thus, a lower expense ratio is beneficial for you as you will be paying a lesser amount of money from your returns.

Different Mutual Funds Have Different Risk Levels

Different mutual fund categories carry varying risk levels. Understanding the mutual funds and their associated risk is crucial before investing in a mutual fund. For example, equity funds are tend to be higher in risk when compared to debt funds.

The riskometer (introduced by SEBI) is a tool designed to help investors assess the level of risk associated with the mutual fund so that they can make informed decisions.

The riskometer represents six levels of risk on a scale: low, moderately low, moderate, moderately high, high, and very high. This aids the investor in understanding the degree of risk associated with the fund so that they can make more informed decisions based on their investment goals and risk tolerance.

Fund’s Past Performance

Though it is true that the mutual fund’s historical performance does not always indicate the mutual fund’s future performance. However, it can provide you an idea about the fund’s performance against other funds with the same investment objective.

Along with the fund’s past performance, do not overlook the fund’s consistency of returns. More than the fund’s past performance, consistent return is a significant factor in determining good mutual funds.

A mutual fund giving 5% consistent returns every year is better than the fund that has given an 8% return in the first year and -5% in the second year. Mutual fund advisory services always recommend prioritizing consistent returns while selecting mutual funds investment plans, especially for long-term investments.

Lock-in Period

While most of the mutual fund investments offer high liquidity, there are some close-ended mutual funds like ELSS (Equity Linked Savings Scheme) that are likely less liquid and have a short lock-in period. Close-ended mutual funds have an attached maturity date that generally ranges from 3 to 5 years.

This means that the investors cannot redeem their units before the maturity date. However, these funds are designed for tax savings and are suitable for those looking for a long-term investment horizon.

Fund Manager’s Experience

Before investing in mutual funds, evaluating the fund manager’s expertise and experience is crucial. Effective fund management requires a comprehensive approach to determine which fund best aligns with the investor's goal and risk tolerance. However, the role of a fund manager goes beyond selecting the best funds for investors.

The experienced fund managers have likely seen various market cycles, are well aware of the market dynamics, and know how to deal during market volatilities, including downturns or high-growth periods.

Thus, they know how to navigate through these cycles and make well-informed investment decisions, like when to buy, hold, or sell them for optimal returns. Thus, the experienced manager can effectively develop investment strategies to mitigate risks even during periods of market volatility.

Therefore, assessing the fund manager’s experience and past track record is crucial, as it can significantly impact the fund’s performance. An experienced and skilled fund manager ensures higher potential returns to investors and also ensures that the portfolio aligns with their investment objectives.

Still Unsure of Mutual Fund Investments? The Best Is To Connect With A Financial Advisor

If you are still unsure of which mutual fund will be ideal for your investment strategy and that also aligns with your investment objectives to ensure optimal benefits, then connecting with a financial advisor is always the best choice.

They can help you choose the right mutual funds and develop a personalized investment strategy that meets your investment goals. Sana Securities is one such well-renowned financial advisory service we highly recommend you to connect with.

It is a SEBI-registered financial advisor that is trusted by thousands of investors globally. The CEO of Sana Securities, Mr. Rajat Sharma, is a reputed stock advisor who is trusted by investors as one of the top stock advisors in India.

Therefore, if you are looking for a financial advisor for mutual fund investments, you can connect with advisory companies like Sana Securities before investing in mutual funds to safeguard your money and get maximum returns from your investment.