In our earlier blog, we have seen the top performing Mutual Funds in Equity-Flexi Cap category. In this blog let us understand the 11 factors to consider while selecting mutual fund schemes to invest, apart from returns.
Due to the large number of mutual funds available to invest, investors are frequently perplexed. All funds have their own pros and cons. But investors often have different needs and goals, which are called as ‘Investing Objectives’. Investors should make investments according to these objectives. But before you start investing, you must first choose the type of mutual funds you wish to use, such as whether to invest in equity, debt, or hybrid funds and which subcategories to go under each. Then, based on a set of criteria, you can select the funds. We will go over the key elements that a potential investor needs to think about before making a financial commitment in this article.
- Investment Goal
Recognize your financial objectives and investment goals. Do you invest for capital preservation, income generation, or long-term growth? Mutual funds’ goals might differ, depending on whether it is Equity fund for growth or Debt fund for income. Within Equity category there are Large-Cap, Mid-Cap, & Small-Cap funds having different objectives.
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Risk Tolerance Level
Consider your investing horizon and risk tolerance. Mutual funds have varied degrees of risk, so it is important to pick ones that fit your tolerance level. In general, higher-risk funds have a higher potential return but also more volatile performance. Pure Equity funds are considered to be riskier (volatile) and Debt Funds a little less risky comparatively.
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Investment Time
Time horizons and investment objectives go hand in hand. You can actually establish your goals according to how long you plan to keep your investment. Long-term objectives give you the opportunity to concentrate on growth-oriented equity funds because you will have plenty of time to ride through market fluctuations, for example with retirement savings.
A balanced portfolio of growth and value funds that offer strong returns and stability against market volatility should be used for mid-term aims.
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Fund Performance
Examine the historical performance of the mutual funds you are thinking about. Analyze their returns over a range of time periods and compare them to related benchmarks and other businesses. Achieving success in the past does not ensure success in the future. Further, just by looking short term returns, don’t jump into conclusion. Consistency in returns matters.
Fund’s performance can also be judged by few ratios. Most popular ratios are Alpha and Beta. Alpha is an indicator of returns & Beta is an indicator of Risk.
Alpha depicts the excess returns delivered by the fund over & above the benchmark. On the other hand, Beta is related to the volatility in relation to benchmark. Beta above 1 indicates that the fund can perform better on uptrends and fall more in market corrections. A beta below 1 indicates the reverse. Higher alpha & lower Beta in comparison to peer funds is preferable.
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Fund Manager and investing Team
Consider the fund manager and the investing team’s expertise, track record, and experience. The ability to produce consistent performance can be greatly aided by a knowledgeable and experienced workforce.
All AMCs are required by SEBI regulation to disclose both the information about the fund managers and the asset allocation. It is advised that you investigate the qualifications and expertise of the fund managers, as well as the sorts of funds they have managed and the returns of those funds. Before making an investment, you should be aware of the fund managers’ track record for outperforming or matching benchmark index performance. Remember to note whether the returns were less or more volatile than market indices as well. The management of the fund, whether actively or passively managed, should also be considered.
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Expense Ratio (%)
Recognize the mutual fund’s expense ratio. This ratio, which takes management fees and operating costs into account, may have an effect on your overall results. In general, lower expense ratios are preferable since they allow investors to keep a larger portion of the investment earnings.
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Exit Load
Similar to the expense ratio, certain funds can charge an exit load if you redeem your investment below a specified time period. Therefore, you must determine whether the schemes have exit loads or not.
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Investment Style
Evaluate whether the mutual fund’s investment philosophy aligns with your own. While some funds concentrate on value investing, others can have a growth- or index-based strategy. You can pick up the fund that complements your preferred methods of investing.
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Diversification
Diversified funds distribute investments across many asset classes, industries, or geographical regions, which can aid in lowering risk. Check to see if the fund’s diversity supports your investment objectives. Concentration towards specific sector or company may be risky.
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Fund Size (AUM) and Liquidity
Consider the size and liquidity of the fund. Mutual funds with higher AUM (Asset Under Management) may provide stability, but due to the lack of investment opportunities and options, very large funds may struggle to maintain performance. Check the fund’s liquidity against your investing requirements as well.
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Investment Policies and Restrictions
Review the investment guidelines and restrictions for the fund. Specific restrictions on asset allocation, concentration, or investment tactics may apply to some funds. Make sure these suit your preferences and level of risk tolerance.
Conclusion:
Choosing mutual funds involves choosing the category and then the plan that best suits your objectives and risk. You must consider a few things, including the fund type, its performance, the AMC’s track record, and the fund managers’ track records.
Check the scheme’s volatility as well as the costs it imposes on you in the form of operational fees and exit charges.
Before investors make a choice, they need also consider the taxation part of each category of funds, depending on whether they will generate long-term or short-term returns. Very important to pay attention to the 11 Factors to Consider While Selecting Mutual Fund Schemes to Invest
It’s not about the funds available in the market, it is about you.
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