Planning to invest in Mutual Funds? Here is how you can pick the right one- Be a wise investor

Indian investment market is flooded with variety of investment securities and with over 3000 mutual funds schemes to choose from, it can be a challenge for new and naïve investors to make a favorable choice. 

But being one of the easiest ways to invest in the markets, mutual funds should not be missed only because you were not able to choose the right one. 

It’s very easy to get influenced with what others recommend or being blindsided based on one single high return. This is a huge risk you are taking, and no one knows your investment appetite like you do, so follow the below shared parameters which will surely help you get the best scheme in your preferred category. To understand mutual funds, read my earlier blog “Various Investing options”

But before we begin, you need to identify your risk appetite, how long do you plan to stay invested and if you are looking for growth or regular returns (dividend).

5 years rolling Returns: When we follow just a single year return history, it gives us a very vague answer as that year could have been a bullish or a bearish one for the market and the performance of the MF could have been impacted. The best way to understand the performance is to check its past 5 years performance history as it can give you an averaged-out calculation of the MF performance. 

Expense Ratio: An expense ratio is a measure of MF’s operating cost relative to its assets. Put in simple words, it reflects the fees charged by the Asset Management Company (AMC) for managing, administrating and promoting and distributing the MF. The lower the ratio the better it is. This ratio is capped at 2.25% by SEBI, the market regulators. 

Fund Manager’s experience: You know that when you are investing in a MF, you are handing over your money to the Fund manager who is going to decide on your and other investors behalf as to where to put that money so that the fund performs well. Hence, we need to make sure that the person sitting there is well qualified, experienced and has a track record of well performing MF’s who have given better returns in the past. There are times when even the best minds in the business have had bad years lasting for 2 to 3 years. 

Asset Management Company: AMC is the fund house that manages all the mutual funds under its umbrella. E.g., Axis Mutual Fund is the fund house that manages MF’s like Axis Blue-chip Fund, Axis Midcap Fund, Axis Triple Advantage and more. And many a times decisions are made at AMC level by the Chief Investment Officer. So, we need to understand and check the track record of the AMC. 

Asset Under Management (AUM): AUM means the total amount of money invested in a MF by investors. If a MF is doing really good, it may receive a lot of investment inflow from investors and if the amount gets too large, the Fund manager may have to alter the investment scheme to accommodate the new inflow. For example, if the MF is a Small and Mid-cap scheme, the MF manager may start investing in Large-Cap funds which could hinder the final performance of the Fund. 

Crisil Rating: Crisil assigns ratings to MF’s based on the risk of the underlying securities in a fund and the score can range between 1 to 5. Higher score is always preferable. 

One thing to keep in mind is that don’t go by the market swing when investing. If the market is seeing a rally and you decide to invest, chances are in some time the pendulum will swing in the other direction as the market will see a correction in its rates. 

It’s very easy to get tempted by the recent success of a Fund but if you are looking at picking a winner, choose a fund which is positioned for future success. 

Putting your finger on one MF from the vast ocean of schemes available can be a daunting task and can could even be over-bearing for some, but if you do your due diligence based on the above parameters, you are in for a win. 

This blog is part of Blogchatter Half Marathon Stay tuned for some more interesting topics in the pipeline. 

Disclaimer: MF investment is subject to market risk and the above tips shared are the best practise one must follow to choose the right scheme/fund.