It’s a challenge to choose a mutual fund scheme. There is an endless list of checks necessary to be done before arriving at the one mutual fund scheme that meets your requirements and has potential to give decent returns. Below are the various checks to keep in mind while comparing mutual funds:
Know your fund house
Choosing a fund house in which you have sufficient faith to invest your money in is important before zeroing in on a scheme of your choice. Investors look for fund houses which can take care of their investments and can manage their money well. Objectives set by fund houses help investors to meet their goals thus securing their future. If the objectives are not met, investors lose faith in the fund house. One needs to ascertain how schemes have performed during various market cycles managed by the fund manager. A good fund manager is not only important for the fund house but also for an investor.
The next important check is to know the philosophy of the fund house. A set of guiding principles that inform and shape an individual’s investment decision-making process is termed as the philosophy of the fund. The fund house’s investment philosophy plays an important role in determining the performance of its funds in different market conditions. The selection of the funds, investment decisions are directly dependent on the fund philosophy.
Charges and fees
An asset management company (AMC) that spends on the upkeep of a mutual fund is measured as the expense ratio of a fund. The fees of the advisor, record-keeping, legal expenses, accounting, auditing fees etc. are what make up an expense ratio. Higher churning of portfolio leads to higher costs. It is an expense borne by the investor and is deducted from the investment. For example if you have invested Rs 100 and the expense ratio of the fund is 1.25, then your investment is Rs 98.75. Lower expense ratio means that higher amount is available for investment.
In today’s world it is very important to maintain a good relationship with the customers, and to maintain a good relationship, there has to be a high level of transparency. This holds true even for mutual funds, as all mutual funds disclose the stocks they buy. Asset management companies to disclose all commissions paid to distributors. So when it comes to long term wealth generation that puts the investor first, it may make sense to invest in a fund which focuses on transparency and controlling costs – rather than investing in a typical high-cost mutual fund that consciously uses big ads to attract your money!
The last factor is return on investments. All the above factors are major drivers behind the performance of the funds. There are many other factors which have direct and indirect impact on performance of the funds; however, we have discussed the major factors above. Moreover it is important to understand that the performance of the funds can change over a period of time (positively as well as negatively), however, its philosophy, ethics, investment strategy are the main pillars. Don’t just only compare the performance of the fund in isolation. To conclude, sound knowledge and research is very important before choosing a mutual fund to park your hard earned money. Following all the above steps might help you take right decision. However you may consult your financial advisor before taking any investment related decision.
—Quantum Mutual Fund