What needs to be considered while buying a Mutual Fund?

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The mutual fund industry is characterised by the problem of plenty. With hundreds of mutual fund schemes in India, across over 40 fund houses, how would you know which funds are worth investing in?

Let’s look at the top things to consider when you choose a mutual fund. The points below are applicable to equity mutual fund schemes in India.

Track record

 This is, by far, the most common parameter which investors look for. The track record of the mutual fund schemes is based on the past performance of such schemes. The irony in this is that every bit of communication from a mutual fund company states that the past performance of the scheme is not an indication of the future performance!

So then, should this be ignored? No. The answer to this is to look at the performance over a long term, at least for a period of 5 to 10 years, rather than considering the short term historical performance of the scheme. As equity mutual funds deliver superior returns only over the long term, it is important that you do not get swayed by a fund which has delivered excellent returns over the past 6 months or 1 year. Analyse the returns clocked by the scheme during both the periods of ups and downs in the industry.

Benchmark comparison

Every equity mutual fund scheme has its own philosophy of investing and can be compared to a benchmark index. Choose a scheme which has outperformed its benchmark or delivers returns which are at least comparable to benchmark returns.

Example: Returns of a banking sector oriented equity mutual fund scheme should be compared with returns of the Bank Nifty or the Bankex.

Management

 A mutual fund scheme which is backed by a sound Asset Management Company (AMC) is an ideal pick compared to an unknown scheme. Find out details about the fund manager who will be managing your fund. Ideally, the fund manager should have seen through a few business cycles to understand market movements. In addition to the fund house and the fund manager, it is important that the mutual fund has a stable management team, who can manage the fund’s activities even if the fund manager leaves the fund house.

Expense ratio

 The fee charged by the fund house to manage and operate the fund is known as expense ratio, which includes management charges, administrative charges and other operating costs. These expenses are paid by the unit holders even if the fund doesn’t do well in any year. Hence it is very important to focus on this parameter. Look out for well managed funds which have a low expense ratio.

Portfolio allocation

 When you have shortlisted a few funds, study their portfolio allocation. Understand the quantity of funds invested in the various categories and stocks. Studying the portfolio allocation helps you to understand the risk profile of the scheme.

The above are some of the top things to look out for when you plan to invest in an equity mutual fund scheme in India. Of course, you can outsource such aspects of your investments, by availing services of qualified Financial Planners.

 

 

 

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