How to choose mutual funds?

It has been seen that choosing the best mutual fund scheme is difficult for most of the people because people are still not aware about the fact, benefits or how does it actually works or how they can simply choose mutual funds. The biggest mistake that mutual fund investors make is selecting mutual funds only on the basis of performance and that too just the recent performance. Choosing a scheme purely based on its recent performance will do no good to the investor, that is why one should give his/her enough time in thinking about the other factors too such as charges, downside risk, consistency of performance etc.

Here, we have attempted to put together a simple guide to choose mutual funds of your choice that would keep help these investors how to choose an ideal mutual fund scheme. To begin with, all you need to do is to identify your goals, investment horizon to achieve them and your risk profile.

Get your mutual funds scheme from the best Fund house 

Nowadays, when you can access internet so easily, it is become important to search for the best deal around you ad identify fund houses that have a strong presence in the financial world and provide funds that have a reasonably long and consistent track records. The best fund house will definitely provide you the best of the services and benefits

Look for consistency in performance

Yes! You heard it right but not the recent performance like 3 or 4 months but over longer time period like 3,5,10 years, if that available, rather than the short term returns. Select schemes that have consistently beaten their benchmark indices (index to which a fund’s returns are compared) and compare reasonably with their peer set over the above time frames. A good mutual fund scheme is one that consistently manage to outperform its benchmark over 3-5 years.

Check the Portfolio Diversification

Mutual funds are supposed to provide diversification across different asset classes, stocks, sectors and even geographies A portfolio biased towards a particular stock has more risk and if we talk about diversified portfolio that it has less risk compare to that, an asset class or a sector.

One should check the portfolio history of a particular scheme and see if the fund has been historically maintaining a well-diversified portfolio. Time to time, visit the website of a fund house to look at the monthly portfolio of a particular scheme. Also, find the portfolio details of mutual fund schemes on the websites of mutual fund trackers such as Value Research and ICRA Online.

RISK-RETURN TRADE-OFF

When it comes to investment, then most securities come with a degree of risk. In case, returns are not in good proportion to the risks taken, it is not worth going for such investments. If you will get better returns than others for the same kind of risk taken then definitely it is a good mutual fund to invest in.

One of the indicators of risk-adjusted return is Sharpe Ratio, which is excess return given by the fund over return given by a risk-free instrument divided by a statistical term. That statistical term is known as called Deviation, which tells how volatile the returns of the fund have been over a period.

Consider Expense Ratio

The ratio is the annual expenses incurred by the funds expressed in percentage of their average net asset. You should consider the expenses charged by them to make the choice between two similar funds o choose mutual funds best in the market. Lower expenses benefit you in the longer term. Usually, schemes with higher assets have lower expense ratio than that of a small sized fund.

There are some fixed expenses which are associated with the fund get spread out over more investors as the funds grow larger in size, reducing the expenses and leaving more funds for investment.

Fund manager tenure and experience

Fund manager plays a very important role when it comes to choose mutual funds in the fund’s performance and it is a process oriented approach but still, fund manager is the ultimate decision maker and his experience and viewpoint counts a lot. Even knowing the fund manager of the scheme is also an important part and what his past track record is. You should also keep a regular check at the performance of other funds which he is managing. If the fund manager of the scheme has recently been changed, don’t panic.  Pay your whole attention on his performance by looking at alpha and quarter to quarter performance.

Best Performing Funds

Before investing your money in mutual funds it is necessary for any investor to research the best performing funds in the market. If you see on the debt side, then the frequent interest rate changes by the Reserve Bank of India (RBI) which kept all the debt fund managers on their toes. Bond prices fall with the hike in interest rates presenting an opportunity for fund managers to take position in these securities. The real character of mutual funds and fund managers can be judged by these kinds of markets.

All the parameters given above are overlapping each other in some way or other. Choosing a mutual fund of your choice and also which can benefit you the most in future is no big task these days. All you need to do is to know what is better for you, not for short term but for the longer period. Choose mutual funds which will not lead you to the further disappontment.

 

By | 2018-01-09T07:24:01+00:00 December 21st, 2017|Mutual Funds|0 Comments

About the Author:

Pulkit Jain is the founder of LegalRaasta – India's top portal for registration, trademark, return filing and loans. Pulkit is a veteran CA with over 10+ of experience.

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