Checklist: How to choose the right Mutual Fund

Ajit Narasimhan July 24, 2019 0 Comments

As investors, we always want to make sure that our investments give us the best returns. We look at performance numbers, fund rankings and what not to ensure that we invest in the best fund there is. But, there’s a difference between choosing the best fund and the best fund for you.

What’s this difference? The best fund in the market may not necessarily meet your investment needs.

So then, how do you choose the fund that is just right for you? Here’s a little checklist:

  1. Assess your investment goals, timeframe and risk appetite

When you know what your financial goal is, how long you’re investing for and how much risk you can take, you can narrow down funds from the existing universe to invest in. For example: You may want a car that costs 5,00,000 in 3 years and you don’t want a fund that has many extreme ups and downs. With this in mind, a mid- or a small-cap fund is not the right fund to invest in even though it may have delivered the highest returns that year. A balanced hybrid fund may be a better choice.

Check out our blogs on equity, debt and hybrid mutual funds to understand which funds suit what needs.

  1. Investment objective of the fund

There’s two ways to look at this: a) is your goal capital appreciation or income generation? b) where does your fund invest? If your goal is capital appreciation over the long term, look at funds that invest in in companies that are growing or have the potential to grow, or ones that are undervalued at the current market price. If your goal is income generation, short term debt funds or liquid funds are what you could consider.

  1. Evaluating the fund and the manager

There’s plenty of information available today on the performance of funds and fund managers.

When it comes to fund performance, there’s two things to look at: performance of the fund against the benchmark, and consistency in fund performance. Has the fund beaten its benchmark year on year? Has it done better relative to its peers?

As for the fund manager’s track record, looking at it will give you an idea of how he’s managed the fund in bullish and bearish phases of the markets. Looking at rolling returns of the fund will give you an idea of the least possible, median, and highest possible return of the fund for a timeframe. This data is not readily available, and you can ask your financial advisor or the AMC for it.

  1. Expense ratios

Expense ratio is the fee the fund house charges you to manage the operations of your fund. This is deducted from the NAV of the fund before it is reported. It’s good to know what your fund is charging you, but it isn’t much of a detrimental factor. Having said that, if you’ve two funds and all else being similar i.e. portfolio, AUM, returns, etc., and one fund charges you a lesser expense ratio over the other, you may opt for that fund after discussing with your financial advisor.

  1. Review your Asset Allocation

When you pick a fund for your portfolio, you need to keep in mind that it fits the portfolio allocation that you’re trying to achieve with your investments. This is because by adding it to your portfolio, you may skew your asset allocation and take on more risk than required or lesser risk to be able to generate the kind of returns you want.

Picking a mutual fund to invest in may seem like quite a task but understanding your goals and choosing a fund in line with them can make all the difference to your portfolio. You can always talk to a financial advisor for help with choosing the right fund.

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