How to Select The Best Mutual Funds
You have been thinking about investing in Mutual Funds. But you are unsure which one to pick based on your requirements. Indeed, selecting the best Mutual Funds to invest in can be a daunting task. There are so many choices that it can be quite confusing. To help you out, here are some helpful tips. They could help you choose the Mutual Fund scheme that suits you best.
1. Identify your objectives and risk tolerance
Do you want long-term capital gains for your retirement planning? Are you planning for short-term goals linked to your child’s education? Identifying your goals clearly is the first step. Only then can you select the right mutual fund from the many available options.
In addition to your objectives, consider your risk-taking ability. Are you open to taking risks? Can you handle the volatile conditions of the market? Or, are you more of a conservative investor? Ask yourself these questions before investing in a Mutual Fund. Choose a Fund that matches your risk appetite. After all, you would not want to lose sleep over an investment.
2. Select the right fund type
What fund you should invest in will depend on your objectives and risk tolerance. Say, you are looking for long-term capital appreciation and are open to taking a risk. In that case, investing in Equity Funds may be the best option for you. Investments in equities and stocks are subject to market risks. But they fetch high returns in the long run.
Now, it may be that you are wary of taking risks. Try fixed-income funds or debt funds in that case. They would generate moderate returns. Balanced Funds take the middle route by investing in both stocks and bonds. They yield good returns with minimal risk exposure.
3. Mutual fund rankings
It is difficult to understand how rankings work. Any given mutual fund may have different ranks depending on who is doing the ranking. Normally, the ranking depends on the percentage of returns. A good measure is the CRISIL rank. CRISIL bases its ranking on several parameters. Try to choose funds with a CRISIL rank of 1 or 2.
Check the long-term performance of the mutual fund rather than short-term spikes. Assess the performance of the funds over the last five to 10 years. This would give you a clear picture of the fund’s performance over time.
4. Evaluate Fund Manager and past performance
Do some research on the fund’s past performance. Look at how the fund manager has performed under volatile conditions. This will give you an insight into the trends in terms of turnover and returns. The fund manager plays an important role in the fund’s performance. So, assess the performance and experience of the Fund manager. Do also check the performance of other schemes managed by the same fund manager.
5. Size of the scheme Assets
Assets under management (AUM) are the total market value of the financial assets of the mutual fund. It is a useful parameter for selecting a good Mutual Fund. The selected scheme should have a considerable AUM. A lower AUM could be risky. That is because you may not be aware of the quantum of investments in the fund. So, any exit of a big investor can hit you hard.
6. Expense ratio
Check the expense ratio while calculating the returns from the scheme. The expense ratio is the recurring cost per unit for operating the mutual fund. This is deducted from your returns. The lower the expense ratio is, the better your returns will be. The scheme should have a reasonable expense ratio. Otherwise, it would eat into your returns. Check also for the entry load and exit load charges of the scheme while purchasing the fund.
The bottom line
Investing in Mutual Funds is a great way to optimise your investment portfolio. The above tips will help you make the right choice and increase your chance of success. But the future is unpredictable. So, make sure you always keep a tab on how your mutual funds are performing.