How to Pick a Good Mutual Fund?

Are you struggling to pick a good mutual fund scheme?

If yes, then you are on a right place!

Everyone wants to invest in mutual funds but choosing the right fund remains the biggest challenge for the investors. There are thousands of funds in the market and one fund may not be best for everyone. Therefore it becomes necessary to find out the best mutual fund as per your needs and preferences.

While choosing a mutual fund, you have to keep some important things in mind, which we will discuss in this article.

Though it may seem difficult for a moment, if you follow the right procedure, it will not be a challenge for you at all. This article will guide you through the process of picking a right mutual fund from among a variety of schemes.

Let’s get started.

1. Decide Your Goal

This is the first and probably the most important step in choosing a mutual fund.

Before selecting a mutual fund, it is necessary to decide your goal. You also need to check whether your investment objective is matching with that of the fund.

You can know more about a scheme by reading its offer document. Every mutual fund scheme has an offer document (also known as the prospectus) where you can find relevant information related to scheme like objective, scheme type, past performance, details about the asset management company, classes of the underlying assets etc.

This way, you can find out whether a plan suits your needs.

2. Investment Horizon

Investment Horizon (also known as time horizon) means how long you wish to invest in a particular fund. This time period can be from 1 day to 5 years or even 20 years.

If your goal falls under the long-term category, then you can invest in equity funds for 5 (or more) years.

Equity Mutual Fund is a long term investment scheme. You should not prefer equity funds for short term investments (at least 5 years) as they are more volatile in such periods.

You can opt for short-term investments like debt/hybrid funds to meet short-term goals. These types of funds guarantee you a fix return along with low risk.

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Data Source: Paisa Bazaar

3. Risk Appetite

Risk appetite means your ability to take risk. This is an important step as it tells you how much risk you should take to accomplish your goal.

Before choosing a mutual fund, you should thoroughly analyze the risk-reward ratio as per your goal. Risk and reward have a direct relationship. Therefore, if your target demands higher returns, you should invest in equity-oriented funds with the intention of taking more risk.

For example, if you want to buy your own house (worth 45 lakhs) in 10 years, you must invest in equity funds with a higher risk profile.

4. Expense Ratio

Expense Ratio is an unavoidable factor in order to pick a right mutual fund.

The question comes: What is an Expense Ratio?

An expense ratio is an annual fee that you pay to the AMC or mutual fund house to manage your portfolio. This fee typically ranges from 0.5% to 1.5%. Many a time, we choose mutual funds without looking at the expense ratio, which is a bad decision from an investment point of view. Another reason to ignore this fee is that it appears to be a small fee.

Do you see it the same way?

If yes, then I should tell you that even a small percent of expense ratio can eat up a lot of your money in the long run. Read more about expense ratio from here.

Therefore, while checking the expense ratio, you should keep in mind whether it is less than 1% or not.

Along with the expense ratio, it is also necessary to check the exit load.

Exit load is charged to an investor when he redeems his investment before the maturity period.

For example, suppose you are investing in a fund with an exit load of x% and a tenure of 10 years. Let’s say you have redeemed your money within 5 years due to some urgent need. This way, you will be eligible for an exit load and the fund house will deduct this fee from your profit.

As a wise investor, you should invest in a fund only after thoroughly analyzing all the charges.

5. Past Performance

The past performance of a fund cannot tell you how well it will perform in the future, but it can give you a rough estimation of the returns and expectations from the fund.

It is important to compare the past performance of a fund with its benchmark. While comparing it with the benchmark, you should check whether the fund is outperforming it or not.

You can also compare a fund with its competitors. Here you need to keep in mind that they should be of the same category. This means that if a fund is small-cap, then you should compare it with other small-cap funds. You can visit websites like Grow and Value Research Online to compare similar category of funds and choose the right fund for you.

6. Records of Fund Managers

Fund managers are the brains of the mutual fund house. The focus on record of the fund manager is as important as you look at the qualifications of a school/college teacher for good education.

The entire burden of managing the fund (in an AMC) rests on the fund managers. Hence, it is important to know about the fund manager and their performance while choosing a fund.

To check the expertise of the fund manager, you can also look for which other schemes he has managed and what the performance of such schemes/funds has been.

I hope this post will help you pick the best mutual fund as per your requirements.

Happy Investing😊