How to select best mutual fund scheme

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In our previous article we have come to know about mutual funds and their types. There are a number of schemes available in market based on their classification. You can select any of the schemes which matches your investment objective. But mere matching of objectives can lead to financial or opportunity loss for you. There are various other factors which you must keep in mind before selecting a scheme. Here are some important points, which you must observe while selecting a mutual fund.

Set your Goal

If you want to start investing, you must have some goal to achieve with the invested money. It can be retirement planning, purchase a house, marriage, child’s education, tax saving or it can be anything. Divide your goals on the basis of time you have to attain your goals. You can segregate them in short goal, medium or long term goal . You can also divide them on the basis of risk you can take to achieve your objective. Such as you do not want to change high risk for the child’s future education but you can take high risk for your retirement.

Know Your Risk Tolerance

You must know about your risk taking ability. As mutual schemes inherits various risks, therefore, it is very much necessary to know your risk tolerance. There are various tools and questionnaires available online to check your risk taking ability for various kinds of needs. You can match your risk taking ability with the risk profile of a particular scheme to take investment decision.

Monitor Performance of Mutual Fund

Now when you have selected some mutual fund based on your goals and risk taking ability, you must compare their performance. You can compare performance of mutual fund by comparing with performance of benchmark and other schemes of same category.

–           Compare with Benchmark

Every mutual fund scheme mentions a benchmark index to monitor performance. An actively managed fund use various strategies to beat performance give by benchmark index. You must check that out of the selected pool of funds which have crossed the returns of benchmark.

–          Compare with Category

You must cross check the performance of mutual funds of the same category for various terms and find out which fund are going better performance. You can also compare them with the ranking provide by various sites.

–          Consistency

Apart from comparing with benchmark and other peers, you must check the historical performance of the scheme. You must check whether scheme is consistent in its performance or not. There are a number of instances when a scheme which is on the top position in a year, performs worst next year. So, you must check consistency in performance of scheme.

Check on Expense ratio

Although mutual funds work in a regulated environment but you must take a look at the expense ratio of fund. As expense ratio below 1.5% is perceived good to invest. You can also check the yearly turnover of the scheme. As high turnover increase the expenses which can affect the return.

Entry and Exit load

In India, schemes do not have any entry load, but charges exit load which can be different for different schemes and different time periods. You must know these loads, because these will affect your capital and profit when you will exit a scheme. Debt funds have high exit loads compared to equity schemes.

Track Record of AMC

An AMC’s reputation builds on its performance in past. A good AMC have comparatively high AUM size. AUM size of AMC depicts the trust of investors on AMC.

Fund Manager’s Experience

You can also check the experience of fund manager, because he is the one who will take decision for your investment on your behalf. So, it becomes very important for you that your fund manager must be experienced. You can take an idea about fund manager’s capability from the performance of fund or funds managed by him.

Check on Cash and Cash equivalent

This a very important point to consider. A mutual fund scheme keeps a portion of its fund as cash and equivalent to fulfill daily needs of redemption and take new investment decisions. If mutual fund has high cash percentage then it can affect the overall return. So always keep a check on this.

Past performance of a mutual fund not guarantee future results. But selecting a good mutual fund can give you desired results. If you select mutual fund wisely it will grow your wealth. But if you select a mutual fund randomly without knowing about the scheme it can destroy your investment too. So it is advised that please do some research work and follow the above mentioned points before investing in a mutual fund scheme.

Happy investing