Every mutual fund investments carry a certain amount of risk which may pertain to returns, market volatility, interest rate change, etc.
Confusing and Challenging - These two words that come to one's mind while choosing a mutual fund scheme. There are so many schemes present in the financial market and selecting the same as per one's risk appetite, becomes very difficult most of the time.
"Every mutual fund investments carry a certain amount of risk. These pertain to returns, inflation, market volatility, interest rate change, ratings, etc. It would be wise to have a sound understanding of each risk before selecting a fund," Adhil Shetty, CEO, Bankbazaar.com.
This involves analyzing relevant questions like determining your financial goals, your investment plans and the amount of risk one can afford. This planning will eventually demarcate the number of investments you need to do. Therefore, while selecting a fund for investing your money, you should keep following points in mind.
Before selecting a fund, you should identify the investment objectives. The purpose of your investment can be anything – from buying a home to ensuring a regular income for your retirement plans.
"Every mutual fund has an investment objective, which states its theme and asset allocation strategy. Checking the investment objective of a fund will help you to find out whether it fits in well with your financial goals, risk appetite and liquidity position," said Manish Kothari - Director & Head of Mutual Funds, Paisabazaar.com.
Simply comparing the past performance never works well unless you are lucky enough to get good returns selecting any of the schemes. "Comparing the past performance of a fund with its benchmark indices and peer funds will allow you to find out the consistency of its performance across various market conditions. Instead of just limiting the comparison to the recent past, compare the fund’s performance over the last 3-, 5- and 10-year periods, if available, to arrive at a more holistic conclusion," said Kothari.
The expense ratio is the per-unit cost of a mutual fund scheme derived by dividing its total expenditures with its total outstanding units. Fund’s expenses are ultimately borne by its investors, a lower expense ratio would mean more money left for you in that fund for future compounding and hence, higher growth.
“You should be aware of the investment and commission charges you will be paying to a mutual fund house. A one-time fee is levied while investing in mutual funds. They may apply either during the time of entering the mutual fund, also known as entry load or either during exiting from any mutual fund investment, known as exit load,” said Shetty.
Fund house reputation:
Select a fund house which is known to you and has a strong investment base in the mutual fund industry. "A good fund house focuses on building strong processes and fund management teams. Thus, even when the fund manager of a good fund house exits for greener pastures or for other reasons, the strong organizational process of the fund house ensures the continuity of its past performance in future. A fund house with rich experience across various market cycles are also more likely to tide over future volatility," said Kothari.
Liquidation:When you select a fund, you should also be aware of how soon it be liquidated to have cash in hand in case of an emergency. It would make sense to ascertain the terms and conditions for liquidation. You may need to liquidate your fund investment depending on your short-term need. ELSS funds are tax savings funds and have a lock-in period of 3 years. Therefore, it is very important to consider this aspect before selecting a fund.