How To Choose The Best Mutual Fund

By BankBazaar | August 17, 2017

How To Choose The Best Mutual Fund

Everyone wants to invest in the best Mutual Funds in India. But that may not always be the right thing to do. You need to be very careful when choosing Mutual Funds.

Do not choose a fund just because it’s among the top 10 Mutual Funds or because your agent told you to invest in them. You need to look at certain features of the Mutual Fund before you pick one. Before that, let us tell you why choosing from the top 10 Mutual Funds is not a great idea.

Additional Reading: How Many Mutual Funds Is Too Many?

Have you ever shopped online during those sale days? The demand is so high that sellers run out of stock. Even worse is the fact that some might even start selling products of inferior quality just because the demand is high. Same way, everyone wants to invest in the top 10 Mutual Funds in India. This way, the Assets Under Management (AUM) of the Mutual Fund becomes huge. The bigger the AUM, the more difficult it is for the fund manager to run the fund. Trading becomes tougher. So,

Same way, everyone wants to invest in the top 10 Mutual Funds in India. This way, the Assets Under Management (AUM) of the Mutual Fund becomes huge. The bigger the AUM, the more difficult it is for the fund manager to run the fund. Trading becomes tougher. So, eventually, the fund might slow down because of its size. So, it is better to choose a fund that has been a consistent performer and not only because it is among the top 10 funds in India.

Now, how do you choose a Mutual Fund? Here is a list of things you should be looking at.

Consistent Performer

Most often people choose funds that have given the highest returns. This means that they will assume that a Mutual Fund that has given a return of 14% per year is much better than the one that has given 12% every year. That may be the right way to choose sometimes, but not always. For all you know, the fund that has given 14% might be lagging behind its peers whose average return might be 16%! Similarly, the fund that has given 12% might be the best in its category. It is important to compare returns of Mutual Funds with its peers or benchmark. This will give you the right perspective. How do you find out if the fund has performed well consistently? Look at its returns for the last 5 years. Use the returns from funds in the same category for comparison along with the benchmark.

That may be the right way to choose sometimes, but not always. For all you know, the fund that has given 14% might be lagging behind its peers whose average return might be 16%! Similarly, the fund that has given 12% might be the best in its category. It is important to compare returns of Mutual Funds with its peers or benchmark. This will give you the right perspective. How do you find out if the fund has performed well consistently? Look at its returns for the last 5 years. Use the returns from funds in the same category for comparison along with the benchmark.

It is important to compare returns of Mutual Funds with its peers or benchmark. This will give you the right perspective. How do you find out if a fund has performed well consistently? Look at its returns for the last 5 years. Use the returns from funds in the same category for comparison along with the benchmark.

Additional Reading: 5 Mistakes To Avoid While Investing In Mutual Funds

Risky Or Not

As we all know, Mutual Fund investments are subject to market risks. This applies to all Mutual Funds – equity and debt. If you are expecting high returns from your Mutual Fund investments, then understand that they will involve high risks. It is best to choose Mutual Funds according to your risk profile. Do you have sleepless nights if there is a 5% fall in your Mutual Fund investments? Then, equity Mutual Funds are not for you. If you don’t mind the short-term falls as long as the fund delivers in the long run, then, you can invest in equity Mutual Funds. You will need to measure the risk quotient of the fund before you invest in it.

Do you have sleepless nights if there is a 5% fall in your Mutual Fund investments? Then, equity Mutual Funds are not for you. If you don’t mind the short-term falls as long as the fund delivers in the long run, then, you can invest in equity Mutual Funds. You will need to measure the risk quotient of the fund before you invest in it.

Then, equity Mutual Funds are not for you. If you don’t mind the short-term falls as long as the fund delivers in the long run, then, you can invest in equity Mutual Funds. You will need to measure the risk quotient of the fund before you invest in it.

How do you do that? The volatility of the fund will tell you how risky the fund actually is. In other words, the ups and downs that your fund will go through will be its measure of risk. The higher the ups and downs, the more risky the fund is. So, even if two Mutual Funds give you the same returns, the risks involved might be totally different.

In technical terms, there are two risk measurements that investors are often advised to look at. One is the standard deviation and the other is the beta. The higher the standard deviation or beta, the riskier the fund. Got a fair bit of market knowledge? Check how the fund has done in bear market cycles. If the fund has managed to provide decent returns in a bear market, then the fund might be a well-managed one.

Additional Reading: Choosing Between Various Categories Of Equity Mutual Funds

Good Portfolio

Mutual Funds are all about the underlying stocks and fixed-income products that they invest in. If the portfolio of the fund is good, then the fund is likely to do well in any market scenario. Large cap stocks are considered less risky when compared to small cap stocks. However, it is the latter that provide higher returns. So, a fund having a good mix of both might outperform funds that are only either of them.

Your return expectations can be based on the portfolio of the fund. If you don’t have knowledge about stocks or debt investments, we suggest that you get help from your financial planner to assess the portfolio of the fund. A detailed analysis of each stock that the fund holds will be totally unnecessary. You just need to understand that whether the fund invests in companies with strong fundamentals and a good reputation.

Looking at the fund’s portfolio will give you an idea about how the fund manager is managing the fund.  Where can find this information? You will get a Mutual Fund report from the fund house every quarter or once in 6 months. This report will have all the information that you need.

The Manager Matters

A company is only as good as the people it employs. Similarly, Mutual Funds depend on the fund managers behind those funds. These managers are the ones who take the buy and sell calls and also decide if a dividend needs to be declared. The reputation of the fund manager is also important. The manager needn’t be the most popular one in the media circles. However, they should have a good amount of experience running a fund and should have handled a few reputed funds offered by the fund house. It is best to avoid funds whose fund managers change every other year.

Additional Reading: Your First Steps To Investing In The Stock Market

At A Cost

Good things come at a cost and Mutual Funds are a part of that list. After all, your Mutual Funds are professionally managed and you will need to pay for the services. However, it makes no sense to pay huge fees when there are fund houses offering their services at a much lower fee. Ensure that the expense ratio of the fund you choose is reasonable. Compare the rate with that of its peers, just like you did for the returns. The lower the expense ratio, the better. This is as long as the fund has been a consistent performer.

Ready to make those Mutual Fund investments?

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Category: Mutual Funds

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