SELECTING A MUTUAL FUND

Investing in a mutual fund can prove to the best investment decision only if investors make a decision wisely while considering every crucial aspect. The most important part of investing a mutual fund has to be selecting the best kind of fund. The best kind of fund can be the one that corresponds to your financial goals, needs, and risk tolerance levels. Thus, these aspects are to be given due attention and evaluation once selecting a mutual fund in order to achieve your desired investment and financial objectives.

 

What to look for before selecting a mutual fund scheme?

 Consistent Performance

 To evaluate the mutual fund schemes and their ranking perhaps, investors should analyse the one year return of the schemes. Moreover, the stability in the performance of schemes has to be considered and thus returns for 3 years and 5 years should be well evaluated as well. This evaluation will ensure which mutual fund scheme has been performing well in the past years and which should be considered by the investors.

Investment Objective

Before selecting a fund, investors should look out for the goals and objectives of that particular fund in order to have corresponding objectives. That is, investors should match their investment objectives with that of the fund. In the same way, based on the risk tolerance and investment horizon, a fund should be selected that will provide returns equivalent to the needs. An investor who is not willing to take a high risk should go for debt fund if the investment duration remains shorter and a large-cap fund in case of longer investment duration. On the other hand, a mid or small-cap fund can be procured or suited well to investors who are willing to take high risk and investment duration remains longer.

 Assets under Management (AUM)

 Asset Management Company (AMC) is the company which manages a mutual fund. For example, HDFC Mutual Fund is the name of the AMC which manages schemes like HDFC Equity, HDFC Top 100 or HDFC Small Cap Fund. Net assets of any scheme give a fair idea of the mutual fund scheme. Moreover, fund houses exploit their best fund managers to mutual fund schemes that holds high AUM.  Hence, investors can keep out the mutual fund schemes that are below average AUM in specific mutual fund subclass. A poorly selected stock is often present in several schemes owned by an AMC because the selection has been made at AMC level. Also, investors should look for the Assets under Management (AUM) of the mutual fund. A large AUM makes it difficult for the fund to enter and exit companies in the equity category for small-cap funds, to be specific. However, in the case of liquid or short term debt funds, large size can be favorable.

 

 Exit Load

 Another crucial aspect to look at is the Exit load of the mutual fund scheme. Mutual fund companies collect a fee from investors for exiting a fund. The fee such charged is termed as exit load. Exit load thus is a charged that has to be paid by the investors when dropping out of an investment scheme or fund. The fee charged is known as a load. Exit load is the fee levied by the company at the time of an investor leaving a scheme or investment fund. Open-ended funds permit the investor the option to exit the investment as per his choice. Hence, before opting for a specific fund, its exit load should be well analysed in order to avoid loses.

 Expense Ratio

There is an amount of fee charged by an AMC for administration, management, promotion and distribution of a mutual fund which is known as the expense ratio. Hence, al the expenses incurred by the AMC are covered in the expense ratio. Regular plans have a higher expense ratio than direct plans since in regular plans there is an involvement of distributor or an agent to whom commissions are paid and thus included in the expense ratio. Hence, it is recommended to check the expense ratio while evaluating the returns from a mutual fund scheme. According to industry experts, an expense ratio of 1.5% is considered normal. Higher expense ratios may have an effect on mutual funds whenever they start performing below the expected level.

Fund manager experience

Next important factor to put into consideration is the experience of fund manager of the specific fund and the duration he has been managing the fund for and his past experience in managing the funds. Investors should look at the performance of currently managed funds or manage in the past by that fund manager in order to evaluate the experience and knowledge of the fund manager.