What Should Women Consider While Investing In Mutual Funds?

There has been a visible shift in how women approach their personal finances. Over the past few decades, more women have entered the workforce and become financially independent. Consequently, more women have also started taking control of their personal finances.

Men and women often demonstrate very different investment behaviours, something which we think could be attributed to varying perceptions of money, and varied priorities.

While the considerations to be taken when investing in mutual funds are largely universal and not gender-specific, below are some points that can be especially helpful for women who are new to investing.  

Medium of investment: Choosing the right investment medium is as important as choosing the right mutual fund. There are two ways to invest in mutual fund schemes — through Direct Plans, and through Regular Plans. Direct Plans make you pay a lesser expense ratio because they do not charge any commission or brokerage. Au contraire, Regular Plans charge a certain brokerage, so you end up paying a higher expense ratio. While this brokerage may appear minuscule, to begin with, as time goes by and your investments add up, the brokerage also adds up. A higher brokerage essentially means that you lose the full benefit of compounding, and enjoy lesser returns on your investment. Here is an illustration comparing the returns from the Direct Plan and the Regular Plan of Axis Blue-chip Fund:

*5year actual returns considered for this illustration

What we’re seeing here is a real-world scenario where a Direct Plan is helping the investor earn nearly Rs 19,95,000 more than a Regular Plan. 

Stick to the plan: A mutual fund is not a vehicle for speculation. It is best viewed as a tool for wealth building and achieving predetermined goals.  Studies have demonstrated that women are usually disciplined investors with a goal-oriented mindset when it comes to investing. 

Whether the goal is to build your retirement corpus or to fund your child’s education, having a plan of action in place helps you build your corpus within a set timeframe. A registered investment advisor can help you create an investment plan in keeping with your goals and available time duration. Try to anticipate the need to redeem in the future, and set your goals accordingly.

Allocation is crucial: Now this is something that your advisor can guide you through. A mutual fund portfolio isn’t just about investing in equity. It consists of a mix of various categories such as equities, debts, commodities, themes, and sectors. The right mix varies from person to person. The main factors considered while deciding the right mix are age, income, liquidity needs, liquidity constraints, future scenarios, risk appetite, risk tolerance, and return requirements. The guidance of an expert is essential for efficient allocation when you’re new to investing. An investment advisor can also help with the finer nuances of investing for longer horizons, such as periodic rebalancing and reconstitution. A word to the wise: Always make sure you have a diversified allocation between equity and debt. 

Below are some basic screenings to help you arrive at the right conclusion when you’re considering various mutual funds to invest in.

• Absolute Returns: If fund returns are consistently beating benchmark returns, it’s a good sign.

• Risk-Adjusted Returns: That said, a fund might be beating the benchmark consistently by taking higher risks. To address this concern, you can check whether the firm produces good risk-adjusted returns by looking at the Sharpe Ratio and Jensen’s Alpha.

• Assets Under Management:  For debt mutual funds, large AUM are preferable. For small-cap and mid-cap funds smaller AUM is preferable.

•  Expense Ratio: Small differences in the total expense ratio might create huge differences in the final investment value due to the effect of compounding over a long investment horizon. This is one of the most important metrics to consider when screening mutual funds.

• Fund Manager: A fund manager with lots of experience and good past performance adds to the quality of the mutual fund.

• Credit Quality: For debt mutual funds, the credit quality of the constituents is a very important consideration factor. Debt is used to protect capital. Refrain from investing in funds that have low credit quality investments. 

Dollar-cost: Investing a large lump sum in a mutual fund might not be a good idea because investing lump sum requires an investor to time the market. There are high chances of making an error when timing the market, especially if you are goal-oriented. To mitigate this risk, one can apply the concept of dollar-cost averaging. What you can do is simply invest a predetermined amount regularly through a Systematic Investment Plan (SIP), offered by fund houses. Empirically, longer-term SIPs have escaped the cycles of the market, provided adequate returns, and helped investors reach the goals. 

Pick a good doctor: Just as the human body needs regular health check-ups from a good doctor, an investment portfolio needs regular check-ups from a good financial advisor. Make sure you select a good financial advisor to diagnose your portfolio from time to time and provide advice on aligning your portfolio with your financial goals. The intent of this write-up is to throw some light on the key features you should look at if you’re new to investing in mutual funds. That said, this list isn’t all-encompassing, and there is immense value to be gained by appointing an experienced investment advisor. 

The author is Founder, Tarrakki

DISCLAIMER: Views expressed are the authors' own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.