How To Choose A Right Mutual Fund?
How To Choose A Right Mutual Fund?
Choosing a right mutual fund is one of the defining step in the success of your financial planning. Picking a mutual fund involves choosing those that involves providing good returns at low cost, can strategically enhance your portfolio and meet your investment objectives.
Selecting a mutual funds is a 2-step process:
- Selection of the mutual fund category
- Selection of the scheme in the chosen category
Factors for selecting the mutual fund category:
1. Investment Objective:
Understand your investment goal before investing. A goal can be short-term like purchasing a car or an international family holiday or it can be long-term like retirement planning or child education / marriage planning. Choose the mutual fund category whose investment strategy align with your goals. Based on your financial goals, you can select across different categories of Mutual Funds – Equity, Debt or Hybrid.
2. Investment Horizon:
Investment horizon is the time frame for which the investors want to invest his money in a mutual fund scheme. It can vary from a week to few years. Different fund categories are suitable for different time horizons. Like equity mutual funds are best if the investment horizon is more than 5 years. Below is the recommended fund categories for different time horizons:
3. Risk appetite:
Every investor has different risk-taking capacity depending on the age, financial goals and personality traits. Investor should invest in those category of mutual funds where risk profile matches their risk appetite. SEBI has mandated for all mutual fund houses to display a riskometer for every scheme – low, moderately low, moderate, moderately high & high.
Below table summarizes the fund categories for different risk profiles:
Factors for selecting the right mutual fund schemes:
Once the fund category is selected, the next step involves choosing the right mutual fund scheme in that category. Below are few of the parameters to pick the right mutual fund scheme:
1. Fund Performance:
Measure the fund’s performance against the benchmark index. Check the performance for a reasonable time period. This is to ensure that fund investments have gone through multiple market cycles and returns have been consistent. Investors usually look toward 1 year returns and start assuming that the fund is a winner, however, always look towards 3 to 5 years returns to understand how consistent is the performance.
2. Fund Manager experience:
Success of any scheme largely depends on how efficiently the fund manager allocates the fund’s corpus into different assets. Therefore, performance track record of various funds managed by the Fund manager and his experience is one of the detrimental factors while choosing any mutual fund scheme.
3. Expense ratio
The expense ratio is the fees charged from investors by the fund houses for managing the investments. It is actually the fund manager’s fees for his professional expertise utilized in successfully managing the fund. As an investor, Mutual Fund schemes with lower expense ratio should be preferred, as percentage may look quite small but it can have a big impact on costs when it is calculated across your total investment portfolio. Normally, the maximum expense ratio varies from 2%-2.25% approximately, so be prepared to choose your fund wisely.
4. Exit load
Exit load is the fee charged by fund houses from investors upon exiting / liquidating the scheme. Exit load will be levied only if the investor withdraws from the mutual scheme before a set limit. It is important to check Exit Load of the mutual fund scheme as you might need money before investment horizon. Avoid schemes with stringent exit load criterion.
5. Asset Under Management (AUM)
Net asset of a mutual fund schemes is a good indicator of amount of trust and confidence that investors have in the particular scheme. Also, it’s been observed that fund houses deploy their best fund managers for flagship mutual fund schemes with high AUM. AUM is one of the important parameter while zero-in the mutual fund scheme for your investments.
Net Brokers Takeaways:
Picking a right mutual fund is crucial to the overall success of your financial planning and achieving your investment objectives. Once you have figured out the type of mutual fund you need to invest in – equity, debt or hybrid based on your goals & risk profile, you should choose a right scheme within that category based on its past performance, cost and manager’s track record.
An easy way to do this is to look at the top-performing funds of a category over various periods like one year, three years, five years and ten years. Among these funds, choose the fund that appears in the lists for most periods. You can also take the help of mutual fund expert to give you fund suggestions based on your goals and investment horizon.