5 Tips to Choose the Right Mutual Fund

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Investors are always looking at investment avenues that not only give lucrative returns but can also provide a safety cushion to their capital. The stock market provides higher returns, but not everyone is ready or comfortable with the idea of investing directly in the markets owing to high risk factor and market volatility. Then, there are fixed income securities which comparatively are safer in terms of risk, but do not yield higher returns. Mutual funds – with varied fund options – combine the best of both worlds and offer a better risk-return trade-off.

These days there is a plethora of mutual fund schemes available in the market. So, before investing in mutual funds, it is of paramount importance that you do some research instead of blindly following the trends. This is what will distinguish a good mutual fund investment decision from a bad one. 
Here is a useful guide to investing in the right mutual fund.

1. Set Your Financial Goals 

Do you want to invest to buy a car, pay for child’s education or save for the retirement? Unless you have the visibility of your financial goals, it would be difficult to set an investment horizon and select a mutual fund scheme accordingly. Setting financial goals will also enable you to do your risk profiling. That is, determining whether you are a risk-taker or a cautious investor. If you have a short or middle term investment goal or are averse to risk, then a debt mutual fund scheme would make more sense. However, if your investment horizon goes beyond 5 years and/or risk appetite is high, then an equity mutual fund scheme is ideal for you.

2. Find out the Reputation of the Fund House and Fund Manager

Even though the returns on mutual funds are dependent on the movement of markets, an efficient and experienced fund house and fund manager can make a lot of difference particularly in the time of distress. There is a reason why big fund houses have been around for a long time with a substantial client and asset base. Experienced fund managers would be able to interpret market cues better and help minimize losses for the clients. They are also more adept at identifying good opportunities and allocating the funds across stocks accordingly. A well established mutual fund company would also have its standard processes in place which the right investment support and smooth processing of transactions.

It is also important to know who your fund manager is, his past experience as well as a track record. A fund manager’s decision can have a considerable impact on the growth of your investment.

3. Study the Performance of the Mutual Fund Schemes

All mutual fund schemes have certain characteristics that differentiate them from others. Now, it is extremely important that you compare similar schemes across fund to evaluate the performance. The logic is simple “apples cannot be compared with oranges”. For example, the return on investment in the infrastructure scheme cannot be compared with FMCG or pharmaceuticals. The business model, revenue stream and risks that underlying companies are exposed to differ from one mutual fund scheme to another. In simple words, you should evaluate and compare similar funds of different fund houses to assess the performance. So, if you are interested in infrastructure related mutual fund scheme, then going for diversified fund with high exposure in infrastructure sector won`t help, rather go for a proper Infra theme fund.

It is also important to study the past track record of the scheme, how it has delivered returns during different market cycles and whether it has been performing consistently vis-à-vis its peers. It is advisable to check the mutual fund scheme’s quartile ranking, which shows if the said scheme is amongst the top 25% of schemes in that category in terms of returns delivered. You should choose the funds that consistently appear in the top-quartile every year. Top quartile refers to the top 25 percent of the schemes in terms of returns. Second quartile refers to funds that fall in the top 50 percent but below the top 25 percent. These rankings are available on the websites of various fund houses and mutual fund research organizations.

4. Know the Total Expense Ratio

Total Expense Ratio is the measure of the cost borne by you for investing in a mutual fund scheme. Total expense ratio differs across different categories of schemes and also varies from scheme to scheme within the same category. It’s not a one-time expense but is charged annually on the market value of your investment. It’s always prudent to look at this figure to understand what are the in-built charges you incur in the fund. If you go for the ‘direct plans’ of mutual funds, this expense ratio can come down by 40-60% and help you earn more returns from your invested corpus. If you wish to invest for a long period of time, even a minute difference in expense ratio can amount to a large difference. So, read the fine print and ascertain the kind and rate of charges that you need to pay to invest.

5. Don’t Forget to Trust Your Own Research 

Most investors assume that it is the fund house which has to bear the onus of taking care of your investments and therefore, conveniently leave the research part to them. The truth is that you should be really well versed with the happenings in the market. Keeping abreast with the latest news and updates can very easily give you an idea about sectors that are thriving, surviving or going down. Little research and time devoted to select the right scheme can lead to a more informed choice and better results in long-term. A wrong mutual fund scheme choice not only results in financial loss, but hampers the peace of mind as well. It is your hard earned money, let it remain yours! 

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