1. About 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 allows the investors the benefit of diversification of investments and asset allocation. This may also help in reducing the transaction cost without having to pay 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 helps the investors to have a balanced portfolio of carefully researched and chosen stocks managed by experienced money 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.
As with all things in life, no investment or financial venture is devoid of risks and mutual funds are not averse to risks either. The mutual fund investment vehicles are subject to fluctuations in the market rates and hence may even perform below par and not provide 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 an event of an early exit.
As an investor, it becomes inevitably important to carefully analyze and understand the benefits and risks of making an investment in a mutual fund. The investment 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 certain significant parameters and criteria for a low risk and balanced financial growth that may provide a good return for their investment value.
3. Parameters and Criteria for Selecting the Best Mutual Funds
Each individual investor is unique in his investment decisions. They may be driven by various decisions and motives to choose a mutual fund to invest into. When choosing to invest in mutual fund plans, the investors must carefully look into select parameters and criteria for choosing the best plan which suits them the best. It becomes very important to align ones financial position, decisions, financial objectives and risk appetite with the mutual fund plan that they choose to invest in.
Let us take a look at some of the parameters and criteria for choosing a mutual fund plan that may help meet the above objectives of mutual fund investment.
a) Investment Objective
It is important to assess the objective of investing in mutual funds. Any investment made is done for a fixed period of time. Investments may range from short to mid to long-term and hence require a thoughtful approach while choosing one. The investment objective may help assess the risk factor that one may be willing to take over the period of investment made. 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
Consistency in the performance of the mutual fund plans gives investors a heads-up on how good a mutual fund plan is over a past period of time. The previous 1 year, 3 years or 5 years performance of the mutual fund may suggest how consistent or fluctuating has the mutual fund been in the market conditions.
c) The Outlook for the Economy
It is highly unlikely that the assessment of the economic outlook, present or in foreseeable future, may help in making an exact prediction of a mutual funds’ performance in the present situation or in the coming future. Nevertheless, a judgemental approach is a must to have an informed mind about the overall outlook for the economy. There are various factors that affect the economy ranging from government decisions to industrial and market performances. It is a matter of anticipation and hence the most advisable option is to diversify the investments keeping in mind the short-term and long-term objectives.
d) Asset Under Management
The confidence of the investor in any particular mutual fund scheme is substantiated and further solidified through assessment of the net asset of a mutual fund scheme. This confidence grows over time and helps in choosing the right schemes that have seen a good market performance and stay ahead of other schemes in the growth cycle. The flagship mutual fund schemes with high asset under management are generally managed by the best and experienced fund managers.
e) Expense Ratio
The expense ratio is an important consideration while choosing a scheme as they are known to take away a substantial chunk of the returns. As per industry standards, an expense ratio of 1.5% is a viable deal. Good performing schemes with high expense ratio may not affect adversely either. However, in an event of the bad performance, the same expense ratio may adversely impact the returns. For more details on Expense Ratio, visit ClearTax.in
f) Exit Load
The mutual fund schemes are time bound. In an event of early withdrawal from the scheme before the maturity period, the investor is required to pay an 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 schemes with stringent exit load and choose schemes with minimal exit load to minimize its impact on the returns earned.
The given parameters and criteria for choosing the best mutual fund schemes to suit ones’ 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 of time.
Nevertheless, it is an advice worth remembering that as with all other investment options, mutual funds too, 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.