Mutual funds, only a returns game?

In recent times, we have seen huge inflows into mutual funds. There can be a number of reasons for the same. Then it may be demonetisation or the promotions done by the SEBI (Securities and Exchange Board of India) and AMFI (Association of Mutual Funds India) or may it be due to the MFDs (Mutual Fund Distributors). But the question is should a new investor invest in mutual funds considering the risks involved or the past performance of the mutual fund?

If the investment is made solely based on the mutual fund's past performance then it's time for a reality check. It is to be understood that the past performance doesn’t guarantee future performance. It is very important to take into consideration other factors such as the risk involved, the ability and willingness to take the risk before investing in mutual funds.

Many people invest in mutual funds as they invest in stocks with an intention to earn the gains that investment in direct equity can generate. But this is not a good idea at all as this may make your portfolio unstable, which in turn would lead you towards losses. Investment in mutual funds is different to equity investment due to the fact that stocks are the raw material of equity-oriented mutual funds and not the end product. So it is always advisable to understand the product first before investing.

It is very important to look how the mutual funds have performed in different market cycles, what is the risk that it is taking for generating returns, whether it adopts active management strategy or passive management strategy, what is the turnover ratio? These are some of the things apart from returns that you must check before getting into mutual funds.