Mutual funds are one of the most popular investment options. Mutual funds allow the investors to compound their investment through systematic investment, and therefore providing opportunities to make profits over a period.
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 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 helps 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.
As with all things in life, no investment or commercial venture is devoid of risks, and mutual funds are not averse to risks either. 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
It is essential to assess the objective of investing in mutual funds. Any investment made is done for a fixed period. Investments may range from short- to mid- to long-term and hence, requires a thoughtful approach while choosing one. The investment objective may help in assessing 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 has performed over a past period. The previous one year, three-year, or five-year performance of the mutual fund may imply how consistent or fluctuating the mutual fund had 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 the foreseeable future, may help in making an exact prediction of a mutual funds’ performance in the current situation or the coming future. Nevertheless, a judgemental approach is a must to have an informed mind about the overall outlook for the economy. 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
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 plans that have seen an excellent market performance and stay ahead of other plans in the growth cycle. The best and experienced fund managers generally manage the flagship mutual fund schemes with high asset 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 industry standards, an expense ratio of 1.5% is a good deal. Good performing schemes with high expense ratio may not affect adversely either. However, in the event of lousy performance, the same expense ratio may negatively impact the returns.
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 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.
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.