Over the course of last 2 years, investors have shown considerably higher interest in stock market investing specifically through the mutual funds route following the awareness campaign by the AMFI. With numerous mutual fund houses present in the market, now there are 100s of diversifiable schemes available with different specifications according to the risk and return profile of the investors.
But still, when it comes to investing your hard earned money, people seemed to have remain confused in selecting the appropriate scheme. We take a look at 6 tips that can help in selecting best mutual fund scheme. The domestic research and brokerage firm HDFC Securities says there are six tips that can help in picking up the best mutual funds in India.
Fit with your investment goals
Before taking up the investment decision, one should articulate the investment objective, the purposes to be achieved through it. This implies that investing should be in sync with your timely financial needs and requirements. According to HDFC Securities, if your goal is capital protection, and the objective of the fund is capital appreciation, then it’s a mismatch. If it’s a new fund offer, evaluate whether it has anything new to offer.
Past performance of a certain mutual fund scheme should not be the criteria to select the it but is an surely an indicator of potential of the scheme that it can return. As per HDFC Securities, performance of a mutual fund remains one of the most important yardsticks to evaluate mutual funds. However, HDFC Securities says returns should not be looked in isolation.
Investors should compare mutual fund’s performance against its peers in the category accordingly, to the returns and exposure to the risk. Within the performance, consistency of returns a scheme is delivering should also be assessed.
Expenses and Exit Loads
Apart from returns that a mutual fund scheme is providing, the cost of entry and exit should be taken care off. One of the factors that affect the performance of a mutual fund is its expense ratio. HDFC Securities says, some fund types (aggressively managed funds like sector funds versus passively managed funds like index funds) have a higher expense ratio. Check if your fund is spending more than the average in the category. Most of the debt funds come with an exit load if an investor want to sell before the maturity or any certain period mentioned in the scheme.
According to HDFC Securities, when it comes to index funds, an important factor to check is the tracking error. Index funds are passively managed, and their composition mirrors an index like the Nifty 100. Tracking error is the result of the fund’s inability to exactly mirror the underlying index.
After all, the manager of mutual fund scheme is the driver of that investment pool. The style of mutual fund manager is another key thing which affects the return and risk overtime. HDFC Securities says, knowing who your fund manager is and his investing style will help you take a better decision. Check the manager’s performance across schemes. Also, check if the fund has done well even with different fund managers.
The credibility of a mutual fund house should also be looked upon and investors should not fall prey of recently established funds which are promising higher returns in order to lure customers. HDFC Securities says, the pedigree of a fund house is also important when you invest in mutual fund. Investors should judge on various parameters like, check if it is a well-known, established brand? Does it have many funds that are top of the market? Is its investing style in line with yours? Does it offer a seamless experience to buy and sell your units? Can you buy and sell units online? These will make it so much easier for you to invest.
Last but nowhere the least, technicalities of the mutual fund scheme are also important while considering a scheme for investing. HDFC Securities says, if you are an advanced investor, you might want to consider technical ratios like the Sharpe ratio, which gives you a risk-adjusted return. You can look at several other ratios, including standard deviation, R-Squared, alpha, beta etc.
Disclaimer | Please consult a certified financial advisor before taking any investment decision. Mutual fund investment is subject to market risk, all scheme related documents should be carefully read and analyzed before investing. This report doesn’t endorse or recommend any mutual fund scheme.