How to Select a Mutual Fund?

Last Updated : May 9, 2018, 5:30 p.m.

Like the same medicine does not suit the other patient, similarly the same mutual fund which is right for you may not suit your distant relatives. This is a thumb rule which you should always remember while going for your mutual fund investments.

Selecting a right mutual fund is like selecting a right life partner that matches your ambitious pursuits that you have set for yourself in this life. But how to choose a right mutual fund scheme that works wonders for your investment goals? Well, acquaint yourself with certain facts that can do justice with your investment goals. Whether it is selecting a mutual fund for your child’s higher education, wedding expenses, medical treatment, international trip with family, retirement or getting additional income —-make sure you have picked the right mutual fund that matches exactly the investment goals that you have set for yourself. While picking your mutual fund scheme, ensure that you have given right time for your fund to bag sufficient returns for you. Is your risk taking appetite conversant with the riskometer of your selected mutual fund? Do check before parking away your money in such fund. Let’s explore the basic parameters which should be taken into consideration while choosing your ideal mutual fund scheme :

How to Choose a Mutual Fund Scheme in India?

1. Know your Investment Objective: Since your personal investment objective is closely linked with the investment objective of your mutual fund, choose that mutual fund scheme which is right for your needs. Regardless of your short-term or long-term goals linked with an event associated with your life or your family member, it’s always a wise decision to read the offer document carefully while you select the right mutual fund for yourself.

2. Know your Risk Taking Appetite : Are you capable of taking high risk, moderate or minimal risk? Well, this thing can be gauged by understanding on which stage of lifecycle you are into from a financial perspective. If you are in the age of 20s without dependents, go for equity mutual fund or go for balanced funds if you are married within the age group of 25-30. Above all the lifecycle stages, if you have no clue in deciding the right course of an action plan for yourself. It’s better to assess the level of risk you can take (very high, high, moderately high, moderately low or low risk)while selecting the best scheme for yourself.

3. Assets Under Management: The sum total of assets in which several investors have parked their money in refers to Assets Under Management. It shows the overall confidence of investors towards a particular mutual fund scheme in a specific category(such as equity , debt or liquid ). By gauging at AUM of several mutual fund houses help you to zero in your funds across several categories. It will also help you to hand-pick the best mutual fund for yourself in comparison to the peers of your own fund.

4. Know you Asset Management Company : It’s the time to check out the functioning of your AMC down the line in the market. The years of experience in mutual fund operations ensure the investors about their decision that they are going to invest in the right hands working under the directives of Securities & Exchange Board of India.

5. Performance Rankings of Mutual Fund: It is quite confusing for an investor to pick the right mutual fund scheme on the basis of performance rankings. Normally, mutual funds are ranked on the basis of multiple factors with highest weightage to low weightage in returns. Do your homework right, check the rankings of CRISIL and Value Research before picking the right funds for yourself. As these are the trusted rating agencies on whose performance ranked funds you can keep your funds parked in for a designated time period. Moreover, you can also compare your chosen funds with its peers in the same category(large cap, mid cap, ELSS or sector-specific like pharma, banking & finance, technology etc). However, rankings of your chosen funds can also be tracked from the factsheets of your chosen mutual fund company .

6. Annualized performance of the scheme: Like a scorecard is used to keep a performance track of a student in a school or college, likewise annualized performance of 1-year, 3-year & 5-years help you out in showing you actual returns irrespective of the market volatility conditions. Always go for a consistent performer that will help you out in generating regular returns.

7. Total Expense Ratio : Keep track of the expense ratio as it is the charge which investors have to shell out as a payment made towards operation and administration of the particular mutual fund scheme you choose to invest in. The expense ratio also includes the fund manager’s fees for the scheme you have zeroed-in down for your purchase. Normally, the maximum expense ratio varies from 2%-2.25% approximately, so be prepared to choose your fund wisely.

8. Exit Load : Check the exit load of a mutual fund scheme which you wish to finalize as it is the withdrawal charges that any investor has to pay while on liquidating (or redeeming) your fund. Don’t lose your heart as exit load depends on your timing to stay invested. Be wary of making an exit before one-year from a scheme as you will have to pay 1% as exit load. And if you stay in your existing scheme after 1-year, congratulations as you don’t have to shell out any exit load for it.

9. Fund Manager tenure and experience: Checking your fund manager’s past track record is very important. One can do so by analyzing the performance of funds managed by him especially during difficult phases of the market. Check out the years of experience your fund manager has in managing a particular fund. This will help you to measure the fund manager’s investment expertise across different investment categories.

To sum up, the parameters discussed above will be helpful for you in finalizing your best mutual fund. So, do your homework right in picking the right mutual fund scheme for yourself that is right in almost all respects for your investment goals to get fulfilled. Also, keeping a consistent track record of your chosen mutual fund on a 6-months basis keep you well-informed that you have set your “hopes” on in a right mutual fund for yourself.

Disclaimer : Mutual Fund Investments are subject to market risks, read all scheme related documents carefully before investing.