How to Choose the Right Mutual Fund? A Comprehensive Guide
How to Choose the Right Mutual Fund? A Comprehensive Guide
When you invest your money in mutual funds, you want higher returns. This is the main reason why people invest in mutual funds rather than traditional investments like Fixed deposits and bonds. So as an investor, you may feel that how do I choose the right mutual funds?
While selecting the best mutual fund, you need to keep in mind various parameters like risk tolerance, returns expectations, investment horizon, expense ratio, fund manager etc. These parameters help you in deciding the best mutual fund for you.
What are Mutual Funds?
A mutual fund is a pool of money created by collecting money from several investors who have a common investment objective. This collected money is invested in equities, bonds, money market instruments etc. The fund so created is handled by a professional fund manager who has expertise in the same and carries good experience.
It is the responsibility of the fund manager to assure that investors get the best returns from the investment. The gains and losses from the investment are shared among all investors.
Guide to Right Mutual Fund Selection
As an investor, you may have doubts that how shall I choose the right mutual fund. Here are certain parameters you shall consider before selecting the right mutual fund.
- Investment Goal: Before selecting a mutual fund, you must be clear about your investment goals. If you don’t have a clear goal then it becomes difficult in deciding the right mutual fund. An investment goal can be buying a car, buying a house, child education, planning a vacation etc. On the basis of this investment goal, you can decide which type of mutual fund to select. It can be an equity mutual fund, debt mutual fund or hybrid mutual fund.
- Investment Horizon: Investment horizon means how many years you want to invest in a mutual fund. This depends on the goals. It’s advisable to invest in equity mutual funds for long-term goals like retirement planning, and child education. On the other hand, short-term goals like buying a car, downpayment for a new house etc can be achieved by investing in debt funds. In addition to this for very short-term goals (less than a year) you can invest in liquid funds or overnight funds.
- Risk Profiling: Mutual funds selection also depends on the type of risk profile you carry. You must analyze the risk associated with the investment. And are you comfortable taking that risk? Equity mutual funds carry high risk. As they entirely depend on stock markets. But here the returns are also very high. So, aggressive investors who prefer long-term investments can invest in equity mutual funds. On the other hand, there are debt mutual funds that are more stable and less risky. But here the returns are also low as compared to equity mutual funds. This is best suitable for conservative investors.
- Liquidity Aspect: One of the important aspects while selecting a mutual fund is liquidity. Investor shall invest considering his requirement of funds. Suppose he needs money in the short-term then it’s never advisable to go for equity mutual funds. As equity funds provide low returns in the short-term duration. But if you want the funds after long term may be after 7 years then you can go for equity mutual funds. In a similar way, when you need the money in the short-term maybe 3-5 years then you shall invest in debt funds. But if you want money in the very short term like one year then you can invest in liquid funds.
- Fund Performance: Fund performance is also an important factor to consider for the right mutual funds' selection. Long-term fund performance shall be assessed for this. In the long term, the fund shall have gone through multiple market cycles. If the fund is unable to beat its benchmark, then that fund shall not be considered. Also, you need to assess the profile of the fund manager. A good fund manager can make you earn high returns.
- Expense Ratio: The expense ratio is the commission that is charged by the mutual fund companies for managing the investments. It's one type of fee of fund managers that is charged to investors. You shall invest in those mutual funds that have lower expense ratios. Even a small percentage may be a very big amount.
- Fund Manager: It's the fund manager’s responsibility to help you maximize returns. Check the fund manager’s profile before investing in the mutual fund. A fund manager shall have proper educational qualifications and relevant experience in the mutual fund industry.
Conclusion
Mutual funds help you achieve your financial goals. So, one shall take proper care that they invest in the right mutual fund. This article will help you in selecting the right mutual fund as per your risk appetite and investment goal.