It's a challenge to choose a mutual fund scheme given the number of mutual fund schemes out there. Below are the various checks to keep in mind while comparing mutual funds.
Know your fund house
Choosing a fund house in which you have sufficient faith to invest your money is important before zeroing in on a scheme of your choice. Investors look for fund houses which can take care of their investments and can manage their money well. Objectives set by fund houses help investors meet their goals, thus securing their future. If the objectives are not met, investors lose faith in the fund house. It is important to know how the fund manager manages the funds under him. One needs to ascertain how schemes have performed during various market cycles managed by the fund manager. A good fund manager is not only important for the fund house but also for an investor.
Fund philosophy
The next important check is to know the philosophy of the fund house. A set of guiding principles that inform and shape an individual's investment decision-making process is termed as the philosophy of the fund. The fund house's investment philosophy plays an important role in determining the performance of its funds in different market conditions. The selection of the funds, investment decisions are directly dependent on the fund philosophy.
Charges and fees
The amount of money spent by an asset management company (AMC) on the upkeep of a mutual fund is measured as the expense ratio of a fund. The fees of the advisor, record-keeping, legal expenses, accounting, auditing fees, etc., are what make up the expense ratio. Higher churning of portfolio leads to higher costs. It is an expense borne by the investor and is deducted from the investment. For example, if you have invested Rs 100 and the expense ratio of the fund is 1.25, then your investment is `98.75. Lower expense ratio means that higher amount is available for investment.
Transparency
In order to maintain a good relationship with customers, there has to be a high level of transparency. This holds true even for mutual funds, as all mutual funds disclose the stocks they buy through factsheets. Sebi's new rule, instituted on October 1, 2016, requires AMCs to disclose all commissions paid to distributors in the half-yearly consolidated Account Statements (CAS) they send to investors; all these in an effort to bring more transparency into the system.
It is only when Sebi brought the commission disclose rule that we started paying trail commission to distributors in the regular plan effective April 1,2017, by letting the investor know exactly where the money is going and that it is serving the interests of consumers first. So when it comes to long-term wealth generation that puts the investor first, it may make sense to invest in a fund which focuses on transparency and controlling costs—rather than investing in a typical high-cost mutual fund that consciously uses big ads to attract your money!
Performance
The last factor is return on investments. All the above factors are major drivers behind the performance of the funds. There are many other factors which have direct and indirect impact on performance of the funds; however, we have discussed the major factors above. Moreover, it is important to understand that performance of a fund can change over a period of time (positively as well as negatively). However, its philosophy, ethics, investment strategy are the main pillars. Don't just compare the performance of the fund in isolation. To conclude, sound knowledge and research is very important before choosing a mutual fund to park your hard-earned money.
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