Mutual funds are one of the widely used investment products during recent times. These days people are ready to take risks in their investment choices. They are consciously shifting from conventional investment products like fixed deposits, public provident funds (PPF) etc. to mutual funds, shares, and securities etc. which are professionally managed.
For beginners, investing in mutual funds can be quite a daunting and intimidating experience. While for some it can be complicated owing to the large number of schemes available. For others, it can be overwhelming because of the volatility in the performance of the funds.
The hard-earned money put in the funds in present is directly linked to the future well-being of the investors. Any wrong decision can wipe out their wealth and savings. There is no room for error. This is why choosing the best fund has to be given utmost importance.
How does one start one’s investment journey?
Well! We Indians generally hear from our friends, relatives and colleagues about their investment plans which influence us to start our own journey. And what we commonly do is check the rankings and past record for recent years.
This has its own disadvantages.
Firstly, if a particular fund has a high ranking, it is obvious that too many people might have invested in the same fund at the same time. Now, the fund manager has to invest the bulk money and quality of stocks is compromised.
The performers’ ratings are scaled down with immediate effect. Therefore, it is not advisable to invest by checking the rankings only.
Secondly, there are some funds that take high risks and give high returns in the short term and people get attracted easily.
Although there is a high probability that such funds may benefit you for time being. In the long run, however, if the high risks don’t pull off, there may be a huge loss. These are some don’ts while going for investment in mutual funds.
Now, coming to what to do? Are there any ways where every time you invest in mutual funds, you would get the best returns? Are there any techniques to select the best mutual fund?
Factors To Keep In Mind While Selecting Mutual Funds:
Here are some factors that should be kept in mind while selecting a mutual fund plan.
- Purpose or goal: You will make a better investment decision if your goals are clear. Goals can be both short term and long term. It can be anything you would like to accomplish in the future with the investment like buying a house/car, financing students education, retirement plans etc.
- Duration: Duration refers to the time period you would like to invest your money. It could be anything between 1 day and more than 10 years.There are different fund categories for a different duration. Debt funds are ideally chosen for less than 3 years and equity funds are chosen if the investment is more than 10 years
- Risk: There is no guarantee that the value of money will increase in the upcoming years. It may decrease in due course of time. Risks are always personal. The amount of risk a person can handle varies. Risks and returns are interlinked.
Criteria To Follow While Choosing A Mutual Fund
There are a few criteria that should be followed while choosing a mutual fund. They are mentioned below:
- Performance ranking: It is necessary to check whether the particular fund you are investing in is performing consistently or not. It should have a good rank among its peers.For example: If there are 100 large-cap schemes in the last 10 years, check whether the fund was in the top 25 or not. If it was in the top 25 for almost all the years, it means it has performed consistently.
It neither is a high-risk taker nor has gone through big losses and it is safe to invest in it as it is able to generate good returns over a period of time.
These ratings are available on some mutual funds research websites. Also, the comparison of performance should only be among the same type of schemes. Like mid-cap schemes should only be compared to mid-cap funds.
- Fund manager’s experience: It is the fund manager who tracks the fund and looks over the ratios of profits to losses. A fund is as good as its manager.A mutual fund may be performing well from a long period of time but if the fund manager is no longer the same then the same scheme may not do well in future. The manager’s experience and other funds managed by him in the past should be looked at by the investor.
- Scheme’s AUM: Assets under management (AUM) refers to the value of assets under the management. It is simply, the total market value of all the financial assets which the financial institution manages on behalf of its clients.It increases when performance is positive and new assets are brought and reduces with negative performance. In equity category, a large AUM can make it difficult for the fund to enter and exit companies. But larger AUM is favourable in case of short term debts as funds aren’t exposed.
- Ratio analysis: Risk and return ratios like standard deviation and Sharpe ratio etc. are used for measuring mutual funds risk. A good fund manager is the one who has taken low risks and generated more returns. You can assess the performance of the fund manager while choosing a fund.
- Expense ratio: When you invest in a fund, money goes to the asset management company (AMC) where they invest some money to debt and some to the equity funds on your behalf.They charge you for the administration, management, promotion and distribution of the mutual fund. This figure is capped by the SEBI. Lower expense ratio gives rise to higher returns of a mutual fund scheme.
Though choosing a mutual fund can be a tedious task in the beginning but good returns will always be worth it. As it is always said, mutual fund investments are subject to market risks. But little intelligence and research can help many to secure their future.