Five Steps to Find the Right Mutual Fund

Mutual funds are an excellent investment and have shown consistent growth over the long term, as well as a high degree of safety. But there are many funds in the market and not all of them may be great investments, or risk-free.

Choosing the right mutual fund is an important decision that can make all the difference between significant capital appreciation and losses. As an investor, you should be aware of the different ways to choose good mutual funds, in order to maximise your profits. There are several things to consider, like past performance, the amount of risk, the various charges and so on. But there are five simple steps in which you can find the right mutual funds. They are as under:

Analyse the mutual fund’s performance

Much of a mutual fund’s performance, especially an equity fund, may depend on how the broader markets are doing. Nevertheless, you can compare the performance of your mutual fund against indices like the Sensex or Nifty. There are funds that beat the indices, and these are the ones you should go for. If a mutual fund’s performance does not match the indices, don’t buy it. You can also make a comparison with peer funds in the same category of mutual funds. For instance, if you are looking at a large-cap fund, compare it with other large-cap funds. Choose one that shows above-average returns.

Know your investment horizon and risk tolerance

Another important criterion for selecting a mutual fund is the investment horizon. If you are investing in an equity fund, it is better to have a long-term horizon, maybe five years. It you can spare funds only for short periods of time you may be better off investing in debt funds, especially liquid funds. These invest in short-term paper and are low risk, but do not offer very high returns.

You can also choose either equity or debt funds depending on your risk appetite. If you are extremely risk averse, it makes sense to invest in a debt fund. If your risk appetite is moderate or slightly higher, you can go in for a large-cap equity mutual fund. For aggressive investors, small-cap and mid- cap equity mutual funds offer high returns, but involve also high risks.

Compare the expense ratio of the fund to its peers

Every mutual fund has to spend money on its operations, which is recovered from its investors. The amount that mutual fund companies charge investors to manage their funds is called an expense ratio. Market regulator SEBI has guidelines to limit the amount that can be charged by mutual fund companies. However, some mutual funds manage to control their expenses better than others and have a lower expense ratio. Such funds offer better returns to investors. As an investor, you must compare expense ratios of different funds, along with other parameters like returns, to find the best one for you.

Look into who’s managing your fund

It’s important to find out who’s managing your funds and their competence. Every mutual fund is managed by a fund manager, who decides on what shares or debt the fund should invest in. The competence of this fund manager is crucial in determining the returns earned by a mutual fund. As an investor, you must research the fund manager’s background thoroughly before entrusting your hard-earned money. Most mutual fund companies provide information about their fund managers to investors, so make sure you use it.

Consider exit loads

Many mutual funds charge exit loads when you get out of a scheme. This is to discourage investors from making hasty decisions to get out of a scheme. Fund managers like investors to remain locked in for a long time to ensure stability. Some mutual funds don’t charge an exit load at all. Since exit loads will lower your returns, it’s best to be aware of them and choose schemes that have lower rates.

The process of mutual fund investment, ultimately, is an ongoing one. As an investor, you have to keep studying, and pick the fund that best fits your investment portfolio and financial goals over different tenures. If the mutual fund is not performing up your expectations, it is best to redeem it and invest in another scheme.

Nirav Singhaniya is a Financial Advisor and Share Marketer with 10 years of experience. In his free time, he likes to research on stock trading and share market trends.