How must one pick a Mutual Fund? Here are five things to remember.
The Mutual Funds (MF) industry is growing by leaps and bounds in India with a plethora of funds promoted by numerous fund companies available to the investors. And even though there has been a drop in the market recently, experts believe it will bounce back.
Although the market is lucrative, investing and picking the right funds can be a bit confusing. A visit to any popular MF website gives you a glimpse of this confusion, more so when, when you want to start several a SIPs and build a balanced portfolio.
To ease out the confusion, here are some basic tips that can help you pick funds suited to your needs that have the potential to give you good returns.
Choose As Per Your Goal
Investing in an MF is easy but an investor must take great care to choose the fund in which to invest according to his/her own goals, time frame, and risk appetite. For a long-term investor, equity MFs are the best, but if your appetite for risks is limited opt for large-cap schemes within the equity MF sector. Moderate risk investors can invest in balanced schemes while investors ready to bear large-risks can invest in small caps, midcaps, and sectoral funds.
When choosing a fund, make sure to assess the overall performance for a longer period than just its short-term returns. For instance, let’s take two competing funds X and Y. Fund X has given 150% returns for five years about 10 years back but has given just 30% returns for the past three years, while fund Y has been giving 20% returns since its inception. It may be wise to choose the latter, which is a more consistent performer. Also look at how the fund has performed against its benchmark. A fund that consistently exceeds the benchmark is desirable.
Consider MF Beta
The number that shows the relative change in a fund’s value with respect to the changes in the market is known as its Beta. For example let’s say Fund A has a beta of 2, this means the fund is two times as volatile as the market. If the market is expected to provide a return of 10%, then we would expect the fund to return 20%. On the other hand, if the market was to decline by 6%, the fund would decline by 12%. A beta of 1 means the fund would mimic the market, and a beta of less than 1 means the fund would be less volatile than the market.
Portfolio Diversification and Fund Manager
Always opt for a fund with a diversified portfolio as opposed to a fund that concentrates on a particular asset class or sector. Before investing into MFs always check the portfolio history of a fund. Such details are easily available on MF trackers like ICRA and CRISIL.
The key is to not keep all your funds in the same asset class to diversify your assets to mitigate the effects of any downturn in a particular sector. Widen your horizon to include funds like fixed income funds, convertible funds, arbitrage funds etc instead of just concentrating on just Equity MFs.
Also don’t forget to research about the history of the fund, its fund manager because the performance of the fund depends on a number of factors, and the manager’s decisions have a great bearing on the fund performance. If the manager has had experience in managing similar funds before, try to check his/her track record to get a better idea.
Debt and equity MF schemes have different parameters for a comfortable asset size. Does the size of a fund – which could range from a few crore rupees to tens of thousands of crore rupees – really matter to the investor? There’s no set answer to this. For example, very large funds may mimic market indices but provide moderate returns compared to a small fund with fewer assets that may grow more quickly but may have a higher expense ratio.
Investors must review their MF assets periodically and change their investments to suit their goals.