Mutual funds — despite being subject to market risks — have emerged as one of the most-preferred investment avenues in India during recent years. If chosen carefully, some of the mutual funds (MFs) also have the capability to double one’s wealth over the long term. However, selecting the best mutual fund to suit one’s requirement becomes difficult because of the availability of a large number of schemes in the market. Moreover, mutual fund investment is riddled with numerous perceptions, myths and opinions, and investors are likely to get lost in this maze. Therefore, instead of just following mutual fund investment tips given by your friends and relatives, you need to check many things before investing in a mutual fund. Only then you would be able to say, mutual fund sahi hai!
We are taking a look at top 10 things which you must check before investing in a mutual fund:
One should as an investor ensure that the mutual fund you are planning to invest in has been in existence for a decent period of time. “Simply because investing in newly-established funds is generally considered more risky as compared to a fund which has already proved its existence. The reason behind this is that there is no history to be tracked for these new funds,” says Abhinav Angirish, Founder, www.investonline.in.
2. Background check about the Fund Manager
A check over the experience of the fund manager may ensure that you have given your hard-earned money in competent and deserving hands. A fund manager with expertise in finance and ethical history will be an ideal candidate.
3. Review the MF scheme & investment style
After having done with the evaluation of the fund manager, the broader investment style of the scheme should be well recognized. A scheme which is aligned with your objective and is in line with your risk profile is the scheme which you must opt for.
4. Assess the AUM (Assets Under Management)
The fund with a large asset size generally gives the investor confidence that a large number of people have shown confidence in the fund and have subscribed to it. “Although there is no link of asset size with future returns/performance, but it does apparently boost the investing sentiment of the investor,” says Angirish.
5. Check the Investment Allocation
One should check about where is the money actually being invested in? Is only debt or debt + equity or only equity? And in that too in which bifurcation. The choice of asset class is very important and it should have features aligned with the investment objectives.
6. Fund’s historical performance
Watching at past performance of the fund is important in analyzing a mutual fund. But Note that, past performance is not everything, as it may or may not be sustained in the future and, therefore, it should not be used as the only parameter to select a mutual fund. “What you should be looking for is the fund’s performance in different cycles. Look for consistency rather than ranking. You will be better off being in a fund that ranks 8/50 – 10/50 consistently than with a fund that is 1/50 in a period and 40/50 in another. Also, go for longer-term returns (3-5-7-10-15 years) for equities. Different kind of debt funds must be assessed on different time-frames,” says Angirish.
7. Entry & Exit load
An entry load is the charge put on you at the time of joining the fund and exit load is the charge levied when you sell your units of a mutual fund within a particular tenure. As entry & exit load is a fraction of the NAV, it eats into your investment value. Thus, it is imperative that you invest in a fund with a low entry & exit load, and more importantly stay invested for the long term. Entry loads as a concept has been abolished in India. Exit loads exist and must be assessed.
8. Volatility Measure
One should check returns given by a fund during different time periods and compare them with a benchmark, usually an index and other funds in the same category. “This will help you to know how volatile is the fund as compared to other funds and if it is a correct fund for you, considering your investments attributes,” informs Angirish.
9. Opportunity cost
Opportunity cost refers to a benefit that you as an investor could have achieved, if you hadn’t to take this course of action. Basically, it means checking out returns of other avenues of investments which you can invest in instead of investing in a mutual fund.
10. Inquire about the taxation effect
It is important that you inquire of the tax liability arising from a particular scheme, before you plan to invest your money in it. “It is necessary for you to be aware if your investments will be tax free or taxed and if taxed, then how much? And what will be the overall effect of it in terms of returns due to taxation,” advises Angirish.