The Risk Factor Consideration

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Comparing the Cost of Different Funds

You need to compare the cost next. The fee table in the prospectus may not tell you about all the fees that are perhaps going burn a hole in your pocket. Even no load funds do charge you hefty figures of fees that cover their costs. Take for example the Rule 12-b fees charged by certain funds claiming to cover their marketing, distribution and promotional expenses but not excluding brokerage to agents. A genuine no-load fund should not charge you Rule 12-b fees. A tip: Funds with back end loads have a higher Rule 12-b fees and it varies inversely as the length of your investment there. Ensure the costs are not high enough to upset your expectations.

Check Their Previous Investments

Take a look at the investment philosophy of the company. Try and find out the orientation of the company, whether it has invested in value oriented or growth oriented instruments or how it is described. Funds in investing mutual online or growth oriented fund invests in stocks and securities of stable nature (government securities (G-Secs), Treasury bills and Municipal Bonds). These are not afraid to invest overseas.

Don't forget to check whether the returns are tax free.

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The Risk Factor Consideration

The most crucial analysis is of risk factor. Your investment is not guaranteed and the whole principal can also drown. Some of the risks are as such:

Risk of interest rate

Applies to bond funds with fluctuation in rate of interest. This can protractedly affect the funds' revenues and in turn your dividends.

Volatility of stock market

A nightmarish risk. Funds such as Index funds and sector specific funds track stock market movements closely. They sure go up when stock market does but they plummet when the market plunges. The disadvantage with index funds are that the associated costs (which are absent in index stocks) can wipe out whatever gains you made during good times. You will still have to pay the costs

Credit risk

Risk of credit loss against promise as applicable to bond funds, arising out of the guarantors' inability to meet obligations.

Inflation risk

A slightest upward revision in inflation can effectively wipe out the returns from an average fund. You will have to factor this in before investing.

Check Their Customer Service

A good mutual fund company offers 24/7 support. Analyze the extent, type and depth of service.

Each fund has a different profile for risks and rewards too. The higher promise of return is always accompanied by a greater risk. This is a simple list of facts you should verify before acting on investment intuitions and lure. Thumb rule for being cautious in mutual fund investments is even bank floated funds are not guaranteed no matter whether it associates the bank's name.

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