How to choose the right Mutual fund?

Tue, 27 Aug 2024

5 mins

“Mutual fund sahi hai” all of us know this, but do you know “konsa mutual fund sahi hai”? In India currently there are approx 45 Asset Management Companies which together offer more than 2500 Mutual fund schemes. These many options are naturally going to confuse you. Which Mutual fund to invest in? Which Mutual fund suits my needs? Which Mutual fund will give me maximum returns? How to go about wealth management? Read below to answers all these questions. You may consider various factors while picking up a mutual fund for your investments.

• Goals

  Always have a goal in mind before investing in mutual funds. If don’t have a goal in mind it is similar to driving a car without having any destination in mind. Goals can be short term or long term. Short term goals can be purchasing a house, interior decoration or buying a car. Long term goals may include retirement plans or children’s education. Apart from these some investors choose mutual funds as a tool for capital appreciation or to save tax.

• Risk

  All investments are subject to market risks. Hence it is crucial to understand the risks associated with mutual funds. Certain mutual funds have high risk, however certain mutual funds have low risk. Equity Mutual fund schemes usually give higher returns but have high risk owing to the nature of their investments.
  
  Equity mutual funds primarily invest in stock market. Debt mutual fund schemes offer low returns but are comparatively more stable. Debt funds focus on investing in fixed-income securities like bonds, treasury bills, and other similar instruments. To know more different types of Mutual funds as investment options check out our blog. 

• Liquidity

  Another crucial factor to consider while picking up the mutual fund is liquidity. An investor should know when he/she may require the investment back. Avoid investing in Equity funds since returns are low in short term. However an investor can choose liquid funds if investment is in short term.

• Expense Ratio

  The expense ratio is a measure of the total costs associated with managing and operating a mutual fund, expressed as a percentage of the fund's average assets under management (AUM) over a specific period, typically a year. It includes various expenses such as management fees, administrative costs, marketing expenses, and other operational costs. Always choose mutual funds which have a lower expense ratio. That way you will save on costs.

• Exit Load

  An exit load is the fee AMCs (Asset management companies) charge the investor at the time of exiting or retrieving the units of the fund. The primary reason for levying exit load is to discourage investors from backing out and pulling out their investments before the lock-in period is over.
  
  Additionally, the exit load fee may also reduce the withdrawal numbers from the mutual fund schemes. However, not all funds levy an exit charge on investors. Hence, you need to keep in mind the ‘exit load aspect’ while choosing a plan to invest in.

• Performance Against Category

  Different types of mutual funds (such as large cap, mid cap, small cap, debt funds, etc.) have varying risk profiles, investment strategies, and objectives. Comparing a fund against its peers within the same category ensures that you are comparing similar investment strategies and risk levels.
  
  By comparing a fund to its peers, you can gauge how well it has performed relative to others with similar investment mandates and market conditions. This gives you a clearer picture of whether the fund has outperformed or underperformed its competitors.  

• What is growth/ regular fund?

  "Growth" and "Regular" are terms often associated with mutual fund plans, indicating different options available to investors regarding how dividends or profits are handled. You may choose an option that best suits your needs.
  
  Growth Option:
  In a growth option, any dividends or profits earned by the mutual fund scheme are reinvested back into the fund. This means that instead of receiving payouts, the investor's money continues to grow within the fund. The value of the investment increases over time, reflecting the appreciation of the fund's underlying assets.
  
  Regular Option:
  In a regular option, any dividends or profits earned by the mutual fund scheme are distributed to investors periodically, typically in the form of dividends. This option provides regular income to investors in addition to the potential capital appreciation of the fund. It is suitable for investors seeking regular payouts from their investments.  

• Evaluating Managers and Past Results

  As with all investments strategies, it's important to research a fund's past results. To that end, the following is a list of questions that prospective investors should ask themselves when reviewing a fund's track record:
  
  •    How was the fund’s performance in the past?
  •    Which factors have impacted the performance?
  •    Was the fund's volatility higher than that of major indexes?
  •    Who is the fund manager?
  
  The answers to these questions will give you insight into how the portfolio manager performs under certain conditions, and illustrate the fund's historical trend in terms of turnover and return.
  Before buying into a fund, it makes sense to review the investment literature. The fund's prospectus should give you some idea of the prospects for the fund and its holdings in the years ahead.

• To bring it to a close:

  At InCred Premier, we acknowledge that your hard-earned wealth deserves nothing less than the utmost care and attention. Rest assured, we are committed to providing you with unparalleled investment services.
  
  If you need help or have any questions as you progress, our dedicated team is here for you. You may reach out to us at care@incredpremier.com