Investing is the science of choosing the right asset at the right point in time for the right goal. Many investors whether experienced or beginners try to achieve that perfect time to invest at the perfect price. It is a hard task to achieve as markets are dynamic and no one formula can be used to choose the right investment at the right time for the right price. Mutual funds try to simplify this process for you in an easy manner and with professional expertise. So, investing in mutual funds solves your above problem of where to invest at what time. Here we will try to see how to select the mutual fund that suits you the best.
Risk appetite
The first and foremost factor defining any investment is risk, returns are the results and output of what risks one is willing to take in the investment. Mutual funds offer a variety of risk categories, from defensive, and conservative to aggressive & highly aggressive. What suits best for you can be defined by you only and no one else can impart risk-taking capacity in you. Risks can be ascertained by how comfortable you will be with the losses arising out of investment over a period. Some categories of mutual funds are best suited for new beginner investors who are at a young age and are willing to take risks as they have longer periods of earning years. The first step in selecting is ascertaining your risk appetite which is a very crucial factor in determining your returns on investment.
AMC Legacy
Once you are comfortable with your risk appetite now you get categories of mutual funds from different asset management companies. Asset Management companies are the custodians of our money and the trust we provide to them with our investments. It is crucial to choose the right AMC while investing considering its legacy, its track record of delivering returns, and how much they cost us. In India, almost all asset management companies have shown good performance over the period. However, some outperform peer by a significant margin and consistently maintain their track record. It would be wise to start investment into mutual funds where the legacy and performance track record is strong.
Costs
Mutual fund investments do carry costs with them, and these are in the form of expense ratios. The expense ratios are part of the amount that AMC charges annually on the investment. The expense ratios might be in the range of 0.5% to 2.5% depending on schemes and AMC. High-risk schemes generally tend to have higher expense ratios. In addition, the regular category of funds has higher expense ratios than direct ratios. If you are an experienced investor and know in which fund to invest in, choose the direct way of investing in mutual funds.
Performance
Performance is by far the most widely used factor to select mutual funds. Mutual funds being the long-term investment vehicle by nature should have long-lasting performance. Mutual funds can be filtered in performance in two ways. One on how longer time frame returns have been consistent i.e. 1 year, 3 years, 5 years, 10 years. There are very few funds that have a legacy of 10 years and yet perform consistently over a long period. The second major factor in determining the performance of mutual funds while selection is how many times the fund has outperformed its benchmark index. Each mutual fund scheme is benchmarked with regard to its constituents in the portfolio. For example, if you are selecting a large-cap fund that has all large-cap companies in the portfolio is benchmarked at nifty large-cap index. If the scheme is outperforming the benchmark index over long periods that is a good fund to choose.
Although mutual fund investments are subject to market risks, the previous performance cannot be a true mark to choose investments. However, they give you a reference point of what to expect from the investments. It is always advised to take suggestions from professionals who are registered and regulated by SEBI to take investment advice.
FAQs on the Selection of Mutual Funds: –
What are the 4 types of mutual funds?
Within the mutual fund universe, we encounter four distinctive categories:
Equity Funds for a share of the corporate action, Fixed-Income Funds play the stability card, Hybrid Funds offer a balanced blend and Risk-Averse Money Market Funds. Each class comes with its unique financial choreography.
How do I find a good mutual fund to invest in?
The process of selecting a suitable mutual fund mirrors the discerning choice of a business partner. Delve into the fund’s historical performance – akin to scrutinizing a company’s track record. Assess the fund manager as you would a prospective team leader; a reliable and skilled guide is indispensable. Peer reviews function as the equivalent of client testimonials, offering insights into the fund’s past collaborations.
Which mutual fund is best for beginners?
For those new to the corporate investment terrain, consider mutual funds as training grounds for market participation. Opt for Index Funds and Target Date Funds, acting as seasoned mentors. Their appeal lies not just in simplicity but also in cost-effectiveness-an essential criterion for fledging investors.
What factors should be considered before selecting a mutual fund?
Prior to embarking on a mutual fund engagement, deliberate on pivotal factors:
- Risk Tolerance Spectrum: Gauge your organizational risk appetite.
- Fee Structure Scrutiny: Prudently manage cost implications.
- Performance evaluation: Scrutinize the fund’s historical achievements.
- Managerial Proficiency: Assess the competence and strategy of the fund manager, akin to evaluating an executive’s leadership prowess.
