Selecting a mutual fund scheme

For choosing a mutual fund scheme, there are certain parameters and criteria. However, every individual investor is unique, and one’s financial position, financial objectives and risk appetite are different from the other. Every investor needs to carefully study all parameters and criteria that suit him/her the best for selecting the scheme.

Some parameters that help to select the ideal MF scheme

Align your goals and capacity with the investment objective

The first and foremost thing you require to do is to determine your long or short term financial goals, the duration for which you want to stay in the market, your risk tolerance capacity, and of course, overall financial plan.

Read the mutual fund scheme related documents thoroughly and understand the investment objective of the scheme. Know the kind of securities in which your money will be invested. Evaluate the objectives and confirm that they are in line with your risk profile and investment goals.

Consistency maintained in performance

Check how the scheme performed in comparison with others on the stated benchmarks. Do not judge funds based on their performance over a short period from 6 months to 1 year. Instead, select funds that have given consistent performance giving steady returns over 3, 5, or 10 years by beating their benchmarks. Choose a scheme that has not only performed well when the markets are bullish and doing well but also remained steady during a slump or bearish periods.

Comparison of performance against a benchmark

A benchmark index is a standard against which the performance and stock allocation of a mutual fund scheme are compared. The investment philosophy and the asset allocation of a scheme should follow the benchmark index. SEBI has also instructed that mutual funds use the Total Returns Index (TRI) variant of indices as their benchmarks on the assumption that dividends are reinvested in mutual funds as and when they are declared.

Comparison of performance against category

While selecting a mutual fund scheme, compare its performance with its active peer group, which means compare the homogeneous or same type of mutual fund schemes. For example, a large-cap equity mutual fund can only be compared with other large-cap mutual funds and not against mid-cap funds or debt funds. It helps investors to understand the fund’s performance better.

The role of the economy

The economic condition of a country, government decisions, industrial and market performances, all these affect the market. It is a matter of anticipation, and the pure judgmental power of fund manager plays a vital role in making the decisions and selecting the stocks forming the investment portfolio. Therefore diversifying the investments across asset classes, market sectors, and the fund management style is the most desirable option keeping in mind the short-term and long-term objectives.

Track fund house record and fund manager’s expertise

An Asset Management Company (AMC) or a fund house manages the mutual fund schemes under the directives of the Securities & Exchange Board of India (SEBI). The performance of your investment and the realization of your financial goals directly depend on the decisions taken by the fund house and the fund manager. Hence, check the fund house history of existence, the fund manager’s experience and expertise, and track record across schemes before choosing a particular scheme.

Asset under Management (AUM)

AUM is the fund size or the Net assets of any scheme. The size of a fund increases the fund potential due to which investors highly invest in that fund over other funds showing their overall confidence towards that particular mutual fund scheme in a specific category. The fund houses deploy their best and experienced fund managers generally to manage the flagship mutual fund schemes with high assets under management.

However, AUM of the fund follows diminishing marginal utility. It sometimes not only increases the fund exposure but also increases the overall risk, and after a certain level, it starts affecting the fund performance in a negative way.

Expense Ratio

The expense ratio is an essential factor in choosing a scheme. It takes away a substantial portion of the returns towards management fee, operation and administration charge for managing a particular mutual fund scheme. An expense ratio of 1.5% is a good deal according to the industry standards. With the higher AUM, the expense ratio will be lesser. The higher expense ratio may not impact mutual fund schemes that are performing well but will hit the fund hard when it starts performing poorly.

Exit Load

The financial needs of individuals are unpredictable, and on the other hand, the mutual fund schemes are time-bound. In case of emergency, when one is bound to withdraw from mutual fund schemes prematurely to gain liquidity of assets, the investors are required to pay the exit load. Always check exit load before investment and choose the schemes with minimal exit load requirements. Avoid plans with stringent exit load that reduces the returns earned.

Remember, mutual funds are subject to market volatility; therefore, do your homework properly to construct a balanced portfolio, keeping in mind the above parameters. Additionally, you can also check the rankings of the trusted rating agencies like CRISIL and Value Research online before picking the right funds for yourself.

That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.

With this one can say “Mutual Fund Sahi hai”,  so let me do Nivesh