When selecting a mutual funds scheme, you can use various parameters to determine if you're parking the money in the right product. These include:
Let's take a closer look at each of the parameters below.
Selecting the right mutual funds is important to ensure your investments align with your financial goals and risk tolerance. Here are some key factors to consider when choosing mutual funds to make well-informed investment decisions:
Firstly, identify your financial objectives for the investment, whether it's for travel, buying a new car, or others. This will help you understand how to choose mutual funds that best suit your targets and finances.
Once you have defined your investment goals, you will find it easier to navigate the market and zero in on the right scheme. Doing so will also help you decide on suitable risk tolerance and the type of funds you want in your portfolio.
Looking at the Asset Management Company's track record can dispel your confusion regarding how to choose mutual funds. India is home to many AMCs, so it's inevitable to feel overwhelmed when you're spoilt for choices. Since a typical investment horizon for a funds scheme spans 7-8 years, you want to make sure your investments will get profitable returns.
So, when you compare fund houses, consider factors like investment strategy and fund managers' performance. A proven track record will make for a sweeter deal.
Additional Read: Mutual Fund Trends to keep an eye on in 2021
The expense ratio is an annual fee that all mutual funds charge as a percentage of the fund's average assets under management (AUM). It covers the expenses related to managing the fund such as operating expenses, management fees, and administrative costs.
It's advisable to select a mutual fund with a lower expense ratio as it allows a higher portion of your investment returns to stay in your pocket. Even a small difference in expense ratios can impact your long-term returns, especially with compound interest. So, make sure to compare the expense ratios of your preferred funds before investing to enjoy substantial savings over time and enhance your overall investment performance.
Liquidity is an important factor to consider when selecting mutual funds. It refers to how quickly and easily you can convert your mutual fund investments into cash without significantly affecting their price. Larger funds with higher trading volumes typically offer better liquidity, making it easier to buy and sell units without impacting the fund's net asset value (NAV).
Selecting mutual funds with high liquidity ensures you can access your money when needed without facing substantial losses or delays. This is particularly crucial if you need to tap into your investments for unexpected expenses. Therefore, it's important to understand the fund's redemption policies, including any exit loads or penalties for early withdrawal.
The mutual fund you select should align with your investment goals. Therefore, it's important to determine the fund's primary goal, such as capital appreciation, income generation, or a balanced approach. Make sure it matches your investment objectives, whether it's long-term growth, steady income, or a mix of both.
You should also review other parameters like the fund's asset allocation, investment style, sector focus, and management approach to make an informed decision. This will help you align your investments with your expectations, ensuring a more satisfying investment experience.
Entry and exit loads are charges levied by mutual funds when you buy or sell units of the fund. The entry load is a fee paid at the time of investing in the fund and can reduce your invested amount. The exit load, on the other hand, is charged when you redeem your investment within a particular period, lowering your returns.
Understanding these charges is important as they directly impact your investment returns and influence the overall cost of investing in mutual funds. So make sure to carefully review the entry and exit loads to maximize your returns while minimizing unnecessary fees.
Taxes play a significant role in determining the net returns from mutual fund investments. In India, mutual fund taxes depend on the type of mutual fund you own and the duration of your investment.
Equity mutual funds held for more than a year qualify as long-term capital gains (LTCG) and are taxed at 10% if your profits exceed Rs. 1 lakh in a financial year. Short-term capital gains (STCG) for mutual funds held less than 12 months are taxed at 15% for profits exceeding Rs. 1 lakh in a financial year.
On the other hand, for debt mutual funds, the holding period to qualify for LTCG is three years, and the gains are taxed at 20% with indexation benefits. STCG on debt funds is taxed as per your tax slab rate.
There are two kinds of fund performances you need to look at:
It evaluates a fund's performance against a standard or index. So, say fund A outperforms the benchmark by 2% and fund B by 4% in the same category, then you should choose fund B for investment.
It measures a fund's performance in comparison to the performance of similar types of fund schemes. For example, if you're interested in a debt fund scheme, you should compare it to other debt funds and not large-cap funds.
Additionally, consider the consistency of fund performance to get a holistic overview of its lifecycle. This practice will also help you understand how to select mutual funds for sipor ELSS (equity-linked savings scheme) if you're interested in specific schemes.
When you put your hard-earned money on the line, it's only prudent to make sure you're leaving it in responsible hands. To that end, you should look at a fund manager's past track record to determine if they have the expertise to get you the returns you want.
Also, review the funds the fund manager oversees to get a low-down on how they make changes to the portfolio as the market dips and rises.
Additional Read: What kinds of investors should opt for mutual funds?
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To choose a mutual fund, consider factors such as your investment goals, risk tolerance, and time horizon. Evaluate the fund's past performance, expense ratio, management team, and investment strategy for a comprehensive understanding.
The safest mutual funds are generally those that invest in high-quality, low-risk securities. These include money market funds, government bond funds, and other types of fixed-income funds. Make sure to do thorough research before investing or contact a professional.
For beginners, balanced or hybrid mutual funds are often recommended as they offer a mix of equity and debt investments, providing diversification and reducing risk.
Mutual funds that typically give the highest returns are those that invest in high-growth sectors. However, these funds also come with higher risk. Therefore, it's important to assess your risk tolerance before investing in high-return mutual funds.
The success rate of mutual funds can vary widely depending on market conditions, the fund's management, and the specific type of mutual fund.
To choose funds for a SIP, identify your financial goals and investment horizon, analyse the performance and expense ratios of the fund, and verify the experience and reputation of the fund manager.
Deciding which mutual fund to invest in involves assessing your financial goals, risk tolerance, and investment horizon. Additionally, consider the fund's alignment with your investment strategy and its reputation in the market.
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08 November 2024
7 mins read
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