A mutual fund is an investment product that pools money from a group of investors. The said pool of money is used to purchase different securities. Professionally managed, the funds are invested in different financial securities like gold, bonds, stocks and money market instruments through mutual funds investment. After buying a unit in a mutual fund, you own a small stake in all the investments included in the fund. Mutual funds are an ideal investment choice as they are easy to use, and they offer numerous advantages.
Mutual fund schemes are managed and operated by asset management companies (AMCs). Every scheme comes with a specific investment objective that caters to distinct investment needs. Depending on the fund’s objective, the money collected from investors is allocated to various avenues such as bonds, gold, stocks and other securities. An expert known as a fund manager whose goal is to earn optimum revenue on the fund’s investments manages the mutual fund portfolio. The income generated by the fund is later divided and distributed among the investors proportionately.
Amongst the big challenges, investors face in picking a mutual fund scheme that is suitable for them. The wide variety of mutual fund plans available in AMCs is known to leave investors confused. If you are considering an investment in mutual funds and are looking for tips that will help you to select the best mutual fund scheme, please continue reading below:
- Look up the past performance:
While it is true that past performance is no guarantee of future performance, it is also true that a mutual fund scheme with a good reputation will rarely fail its investors. So, the first tip is that the past performance rarely fails you. Therefore, it is better if mutual funds investors could check the ranking of the scheme in the market. Nowadays, thanks to the internet, it is very easy to ascertain if a mutual funds scheme will be beneficial to the investor. However, it is also important to remember that different portals may have different rankings for different plans. This procedure is referred to as looking up for SIP ranking. Doing this will help you to ascertain whether the scheme is a long-time performer or just a fad.
- Check their consistency:
Secondly, you need to look for funds that are consistent. It’s not just the returns but also the consistency of returns that matter. For example, a fund generates 13%, 14% and 15%. It gives the same compound annual growth rate (CAGR) returns over 3 years. There is another fund that generates 5%, -4% and 47% over 3 years. If you observe, the first fund is more consistent. Mostly, consistent funds can earn good returns irrespective of the timing of entry, so timing is not too important.
- Please check if the scheme aligns with your long-term goals:
Mutual fund schemes are pointless if they don’t help you meet your goals. You also need to figure out if the mutual fund fits into your long-term financial plan or set of goals. The fund must be helpful for you in terms of things like returns, risk, liquidity and tax efficiency.
- Check the risk factor of the fund:
After checking the alignment, you also need to check how risky the fund is. Enjoying 15% returns in an equity fund is great, but before rushing into the scheme, you also need to figure out the risk cost of these returns. You need to remember that a fund that generates approximately 14% returns with 10% volatility is preferable to a fund that generates 16% returns with 40% volatility.
- The fund management team should be consistent:
The fund manager or the fund management team should be consistent over time. Investors should avoid a fund that is seeing a lot of change in senior personnel like the CEO, CIO, fund managers etc. Ideally, the best funds management firms are the ones that have a consistent and long-standing top management team in place. There is a lot more continuity in the policy of investments that way.
- Invest in funds that are inexpensive:
Costs are important too. Even a 1% reduction in costs annually can make a valuable difference to your returns over a longer period. It is important to remember that the TER i.e., total expense ratio gets debited on your NAV daily. Therefore, lower costs mean that the returns will be higher. Prefer opting for funds that have a higher AUM (assets under management) as their impact will be lower on your NAV.
- Choose a fund managing firm with rules for investment:
Please opt for a fund managing firm that functions more on process and rules than one that functions entirely at the discretion of the fund manager. That’s because the fund manager is human after all and might make errors. If the fund manager has full flexibility on things like asset allocation, then you are leaving too much at the mercy of the fund manager, something that’s not advisable.
- Don’t leave everything to the fund manager:
It is also important to note that while investing, you cannot leave everything to the fund manager. You need to monitor your funds on a regular basis. As an investor, your job is not over with just putting your money into the fund. “Invest and forget” is a strategy you should not follow. When you get the records of your investments at the end of every month, check for things like the actual returns, the variance in returns, the portfolio mix etc.
- Check the exit costs:
Before opting for a mutual fund scheme, it is also important to check the cost of exit. Doing so is important as it can be substantial in some cases. Ideally, you should be able to move out of a mutual fund without a huge cost that would impact your net returns on the fund.
- Please tweak the portfolio regularly:
You need to create a mutual fund portfolio that has the right combination of things like equity funds, debt funds, liquid funds, variable funds etc. Moreover, you need to tweak this mix consistently based on things like evolving needs and changing market conditions.
Investing in mutual funds can help you to achieve financial goals over time. Monthly mutual fund investments help your corpus to grow. Even though it may have a slow start, in time, your investment may grow to a large extent. Firstly, identify your goals and select the appropriate funds. Then, start investing.
Disclaimer: Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.