How to choose Mutual Funds

a healthy investment

Sat Dec 25, 2021

How do u choose a fund?

A mutual fund is the best investment tool for the retail investor as it offers the twin benefits of good returns and safety as compared with other avenues such as bank deposits or stock investing. Having looked at the various types of mutual funds, one has to now go about selecting a fund suiting your requirements. Choose the wrong fund and you would have been better off keeping money in a bank fixed deposit. Keep in mind the points listed below and you could at least marginalize your investment risk.

Past performance

While past performance is not an indicator of the future, it does throw some light on the investment philosophies of the fund, how it has performed in the past and the kind of returns it is offering to the investor over a period of time. Also check out the two-year and one-year returns for consistency. How did these funds perform in the bull and bear markets of the immediate past? Tracking the performance in the bear market is particularly important because the true test of a portfolio is often revealed in how little it falls in a bad market.

Know your fund manager

The success of a fund to a great extent depends on the fund manager. The same fund managers manage the most successful funds. Ask before investing, has the fund manager or the strategy changed recently? For instance, the portfolio manager who generated the fund’s successful performance may no longer be managing the fund.

Does it suit your risk profile?

Certain sector-specific schemes come with a high-risk high-return tag. Such plans are suspect to crashes if the industry loses the marketmen’s fancy. If the investor is totally risk-averse, he can opt for pure debt schemes with little or no risk. Most prefer the balanced schemes which invest in the equity and debt markets. Growth and pure equity plans give greater returns than pure debt plans but their risk is higher.

Read the prospectus

The prospectus says a lot about the fund. A reading of the fund’s prospectus is a must to learn about its investment strategy and the risk that it will expose you to. Funds with higher rates of return may take risks that are beyond your comfort level and are inconsistent with your financial goals. But remember that all funds carry some level of risk. Just because a fund invests in government bonds or corporate bonds, it does not mean it does not have significant risk. Thinking about your long-term investment strategy and tolerance for risk can help you decide what type of fund is best suited to you.

How will the fund affect the diversification of your portfolio?

When choosing a mutual fund, you should consider how your interest in that fund affects the overall diversification of your investment portfolio. Maintaining a diversified and balanced portfolio is the key to maintaining an acceptable level of risk.

What does it cost you?

A fund with high costs must perform better than a low-cost fund to generate the same returns for you. Even small differences in fees can translate into large differences in returns over time.

Finally, don’t pick a fund simply because it has shown a spurt in value in the current rally. Ferret out information of a fund for at least three years. The one thing to remember while investing in equity funds is that it makes no sense to get in and out of a fund with each turn of the market. Like stocks, the right equity mutual fund will pay off big – if you have the patience. Similarly, it makes little sense to hold on to a fund that lags behind the total market year after year.

What is NAV?

Net asset value (NAV) represents the market value of all assets per unit, held by the fund. To an investor, it simply signifies the current value of his or her investment in the fund. The NAVs of mutual funds are determined at the end of every business day.

The NAV is computed by dividing the fund's net assets by the number of units outstanding on the validation date and is illustrated below:

Market value of the fund's investment + other current assets + deposits - all current liabilities except unit capital, reserves and profit & loss account / Number of units outstanding

Since the value of the various securities keeps changing, the NAV also changes on a daily basis. NAVs are updated daily and are usually available on the fund’s website and from its investor-service centres. You can Subscribe to receive daily navs through e-mail.

Generally, in-person purchase or redemption requests received up to 3 p.m. on any business day will be priced on the basis of the same day's closing NAV. Requests received after 3 p.m. will be treated as having been received on the next business day, and will therefore be priced on the basis of the next business day's NAV.

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