Mutual funds are one of the most popular investment options. Mutual funds allow investors to compound their investment through systematic investment, and therefore providing opportunities to make profits over a period.
1. Introduction to Mutual Funds
Besides growing wealth, mutual funds offer various benefits to the investors that should be taken into consideration while choosing a mutual fund plan. It provides the benefit of diversification of portfolio and asset allocation. Also, this may help in reducing the transaction cost without having to pay an additional fee or commission on the individual transaction of stocks. The liquidity factor of the mutual funds allows investors the ability to enter or exit a mutual fund plan with relative ease.
The professional management of the mutual funds help the investors to have a balanced portfolio of carefully researched and chosen stocks managed by experienced fund managers. It is, therefore, one of the most sought-after investment options for small investors and beginners alike who are willing to experience financial growth through mutual fund investments keeping in mind the benefits the plans have to offer.
Various risks impact mutual funds. But not all risks affect the fund schemes. The Scheme Information Document (SID) provides with detailed summary and insight on the fund scheme and the risks that apply on that particular fund. The level of risk varies from one plan to another. Micro and macroeconomic market conditions directly or inversely impact every fund. The investment portfolio, fund manager and his decisions in picking up stocks, the underlying assets, and so on also affect the performance, risk and returns of any fund.
The mutual fund investment vehicles are subject to market risk and rates, and hence may even perform below par and not offer the expected returns. To add to the expenses of investing in the mutual fund plans, the profits and various benefits earned from them may attract entry and exit loads, annual charges, and penalties imposed in the event of an early exit.
As an investor, it is inevitable to carefully analyse and understand the benefits and risks of choosing mutual funds. Investments made in these plans with an expectation to make profit hold immense value to the investors and hence, should be carried out wisely. The investors must make an informed decision to invest in mutual funds by considering specific parameters and criteria for low risk and balanced financial growth that may offer a good return for their investment value.
3. Parameters and Criteria for Selecting the Best Mutual Funds
Each investor is unique in his/her investment decisions. They may be driven by various choices and motives to choose a particular mutual fund to invest. When choosing to invest in mutual fund plans, the investors must carefully look into select parameters and criteria for selecting the best scheme which suits them the best. It is essential to align one’s financial position, decisions, financial objectives, and risk appetite with the mutual fund plan that they choose to invest.
Let us take a look at some of the parameters and criteria for choosing a mutual fund plan that may help in meeting the above objectives of a mutual fund investment.
a) Investment Objective
Before deciding to invest in mutual funds, you need to determine your financial goals (long or short term), the duration for which you want to stay invested and the appetite to take risks. The extent to which an investor is ready to bear the risk will reflect on the returns. An investor must always invest in diversifying the investments in the various baskets of funds. Investments may range from short- to mid- to long-term and hence, requires a thoughtful approach while choosing one. An investment objective helps in deciding the macro-level selection of the mutual fund types. Choosing to invest in long-term or short-term plans, or a mix of both can have an instrumental impact on your investment decision
b) Consistency in Performance
The potential of any fund is determined by its consistency maintained in the previous years and how the fund has managed to be on top and perform well by delivering excellent and consistent returns despite the benchmark and market cycles faced. The fund’s three and five-year returns must be checked before concluding to its consistency.
c) The Outlook for the Economy
The economic factors directly impact the markets, both national and global, which in turn affects the portfolio, thus affecting the performance of the fund. The fund manager plays a vital role in making the decisions and picking up the stocks that will form the investment portfolio. All of these depends on the economic condition of the country. Various factors affect the economy ranging from government decisions to industrial and market performances. It is a matter of anticipation, and hence, the most desirable option is to diversify the investments keeping in mind the short-term and long-term objectives.
d) Asset Under Management
AUM of a fund is nothing but the fund size. The size of a fund shows the potential of the fund due to which investors are investing majorly in that fund over other funds. This increases the fund exposure, which in turn increases the overall risk. The best and experienced fund managers generally manage the flagship mutual fund schemes with high assets under management.
e) Expense Ratio
The expense ratio is an essential factor to consider while choosing a scheme as they are known to take away a substantial chunk of the returns. As per the industry standards, an expense ratio of 1.5% is a good deal. Higher the AUM, lesser will be the expense ratio.
f) Exit Load
The mutual fund schemes are time-bound. In the event of an early withdrawal from the plan before the maturity period, the investors are required to pay the exit load. Financial needs of individuals are unpredictable, and in case of emergency, one may be required to withdraw from mutual fund schemes prematurely to gain liquidity of assets. It is advisable to avoid plans with stringent exit load and choose schemes with least exit load to reduce its impact on the returns earned.
The given parameters and criteria for choosing the best mutual fund schemes to suit one’s investment decisions and objective may help in selecting the most appropriate schemes to construct a balanced portfolio. The well-informed choice of plans of schemes, when aligned with investment objectives, may help gain returns over the period.
Nevertheless, it is a piece of advice worth remembering that mutual funds are subject to market risks that cannot be overlooked but can surely be contained to an extent. The parameters and criteria for selecting the best mutual funds are aimed at meeting all those objectives. At ClearTax, we offer you hand-picked funds aimed at meeting your target, keeping in mind your risk tolerance.