Best Mutual Funds: Learn how to select a top mutual fund in India before investing and choose the best performing mutual fund. Here are a few pointers that you can consider while choosing a mutual fund.
One of the most significant challenges individuals new to the world of investing face is choosing the right mutual funds to invest in. If one had the option of randomly picking and choosing, then investments would be a piece of cake. Sadly, this isn’t the case, and it’s essential that you study the pros and cons, and compare it to other mutual fund products. If you’re new to investing in mutual funds, you should read the offer document that contains information, which includes investment objectives. However, you also need to know that before you invest in mutual funds, you need to know whether the funds you are investing in have been registered with the Securities and Exchange Board of India (Sebi).
How to select the best performing mutual funds?
Investment decisions have to be taken by an investor after ensuring that the mutual fund is aligned with the investment objectives and goals of the investor. Many investors wonder what the trick for choosing the right mutual fund is. While there is no straightjacket formula for this, mentioned below are some of the factors you can consider while choosing a mutual fund:
Investment Objective: Assessing the goal of investing in mutual funds is crucial. Investments can vary from short-to medium-to-long-term and therefore require a careful strategy while selecting one. The investment goal may assist in evaluating the risk factor one may be prepared to carry over the investment duration. An investment goal helps to decide on the choice of mutual fund for an investor. Choosing to invest in long-term or short-term schemes or a blend of both can influence your investment decision significantly.
Consistency in Performance: Consistency in the performance of the mutual fund plans gives investors a taste of past performances and instils confidence in the investor. The mutual fund's performance in past one year, three years, or five years can indicate how well the fund performed.
Asset Under Management: By evaluating the net asset of a mutual fund system, the investor's trust in any specific mutual fund system is substantiated and further strengthened. Any investor will be too keen to invest in a fund house that is managed by the finest fund managers with vast experience.
Expense Ratio: The expense ratio is the annual fee that is charged by the fund house. It takes a lot of skill and expertise to manage funds of this scale and nature. The fees include advisory fees, operational costs, investment management fees, registrar and transfer agent fees, legal and audit fees, agent/ sales commissions, ongoing service charges, etc. These expenses add up as the total expense ratio of the mutual fund. The expense ratio is charged annually and is expressed as a percentage and the reporting of the NAV (Net Asset Value).
Exit loads: an exit load is paid by an investor who exits from a mutual fund scheme within a short period of time. One can view the exit load as a form of penalizing the investor to quit prematurely. There is no maximum exit load which can be levied as SEBI has not regulated on this aspect. As a result, different fund houses charge different entry load fees, depending on the holding period.
At the end of the day, no investment decision should be made lightly. The investor should be well-versed with the offerings in the market and be in a position to understand which fund suits his financial and investment objectives, taking into consideration risk profile, age, investment horizon etc. It is advisable to not invest in a mutual fund just because it looks good on the surface: the devil is always in the details.
How to invest and buy top mutual funds?
Investors can invest directly or contact mutual fund agents for the necessary application forms that are needed. Investors need to remember that while going through an agent, they need to ensure that the agent is registered with the Association of Mutual Funds in India (AMFI), and simultaneously has a valid AMFI registration number (ARN). Investors can also invest in index funds directly without a distributor. For investments through the direct plan, the investor needs a financial adviser but does not have to pay any commissions to the distributors. Returns are then maximised as there is no commission paid. As an investor, you are also given the option to directly invest with the mutual fund company by filling a form after visiting the nearest mutual fund branch or fill out your details and submit your documents online. Forms can be deposited with mutual funds through the agents and distributors who provide such services. Investments in top mutual funds can be also made through websites of online aggregators who sell mutual funds.Before making an investment, the investor should take into account the track record of the index fund. As per SEBI regulations, all the mutual funds are required to label their schemes on the following parameters:
- a) Nature of scheme – whether the aim is to create wealth or provide regular income in an indicative time horizon (short/ medium/ long term).
- b) A brief about the investment objective (in a single line sentence) followed by kind of product in which investor is investing (equity/debt).
- c) Level of risk depicted by a pictorial meter as under:
- Low - principal at low risk
- Moderately Low - principal at moderately low risk
- Moderate - principal at moderate risk
- Moderately High - principal at moderately high risk
- High - principal at high risk
An investor should take into account the product labeling before investing in index funds.
What are Exchange Traded Funds?
Exchange-Traded funds, popularly known as ETFs, are mutual funds that can buy or sell at the stock exchange. Usually, the investor buys or sells the fund unit directly or through a distributor. In the case of ETFs, however, an asset management company does not interact with the investor or distributor. Instead, the units are issued to a few designated participants called authorised participants that buy and sell quotes for the ETFs in the stock market. This allows investors to buy or sell the ETFs at any time in the stock market.
What is the frequency of declaring NAV?
Mutual fund companies need to regularly disclose their Net Asset Values (NAVs). This declaration can take place on all business days or every week. However, this depends on the mutual fund scheme. According to regulations put forth by the Securities and Exchange Board of India (SEBI), a mutual fund’s NAV is required to be calculated and published at least in two daily newspapers at regular intervals, not exceeding a week. The NAVs are also required to be made available on the corresponding mutual fund website. Fund houses are also required to put their NAVs on the website of Association of Mutual Funds in India (AMFI) www.amfiindia.com. This allows investors to access the NAVs of all mutual funds at one place.
Does SEBI allow cash investments in mutual funds in India?
You can invest up to Rs 50,000 in cash per mutual fund per financial year in mutual funds. However, any repayment will be made through the bank channel.
Do investors receive a certificate or statement of account after investing in a mutual fund?
A mutual fund house is obligated to send out account statements or certificates within five working days of closing of the initial scheme subscription. If you have invested in a close-ended scheme, the investors would get either a Demat account statement or unit certificates as these are traded in the stock exchanges. In case of open-ended schemes, a statement of account is issued by the mutual fund within five working days from the date of closure of the initial public offer of the scheme and/or from the date of receipt of the request from the unitholders. The procedure of repurchase is mentioned in the offer document. Separately, AMCs are required to send confirmation specifying the number of units allotted to the applicant by way of email and/or SMS‟s to the applicant‟s registered email address and/or mobile number as soon as possible but not later than five working days from the date of closure of the initial subscription list and/or from the date of receipt of the request from the unitholders.
What is the difference between the NAV of a mutual fund and share price?
The share price represents the value of equity of a company as quoted on the stock exchange. The demand-supply and company’s projected performance has a bearing on the share price. This is why the market value and book value of shares matter. Book value represents the value of the company according to its balance sheet. On the other hand, market value is the value of a stock or a bond, based on the traded prices in the financial markets. That’s why the stock market price of a share is different from its book value.
However, in the case of a mutual fund, there is no market value for the mutual fund unit. Therefore, if the units of a mutual fund are purchased at its NAV, it is similar to purchasing it at its book value.
How to choose a scheme for investment from a number of schemes available?
As already mentioned, the investors must read the offer document of the mutual fund scheme very carefully. They may also look into the past track record of the performance of the scheme or other schemes of the same mutual fund. They may also compare the performance with other schemes having similar investment objectives. Though past performance of a scheme is not an indicator of its future performance and good performance i, this is one of the important factors for making an investment decision.
In case of debt oriented schemes, apart from looking into past returns, the investors should also see the quality of debt instruments which is reflected in their rating. Similarly, in equities schemes also, investors may look for the quality of the portfolio. They may also seek advice from experts.
Are the companies having names like mutual benefit the same as mutual funds schemes?
Investors should not assume some companies having the name “mutual benefit” are actually mutual funds. These companies do not come under the purview of SEBI. On the other hand, mutual funds can mobilize funds from the investors by launching schemes only after getting registered with SEBI as mutual funds.
Where can an investor look for information on mutual funds?
All mutual funds have their own web sites. Investors can also access the NAVs of all mutual funds at the web site of Association of mutual funds in India (AMFI) www.amfiindia.com. Investors can log on to the web site of SEBI www.sebi.gov.in and go to the “Mutual Funds” section for information on SEBI regulations and guidelines, data on mutual funds, draft offer documents filed by mutual funds, etc. Also, in the annual reports of SEBI available on the web site, information on mutual funds is given.
I have invested in a debt mutual fund scheme. Can I change the nature of the scheme from debt to equity?
It is possible to change the nature of the scheme. However, SEBI has laid down certain regulations which need to be complied with for affecting such a change:
Any changes in the fundamental attributes of the scheme such as the structure, investment pattern, etc., can be changed only when written communication is sent to each unitholder and an advertisement is given in one English daily newspaper having nationwide circulation. The information should also be published in a newspaper published in the language of the region where the head office of the mutual fund is situated. In case the unitholders do not want to continue with the scheme, they have the option of exiting the present scheme at prevailing NAV without bearing exit load.
What is the Net Asset Value of a mutual fund scheme?
The performance of a particular scheme of a mutual fund is indicated by the Net Asset Value (NAV).
NAV represents the market value of the securities held by the scheme. Since the market value of securities changes every day, NAV of the same scheme varies on a day to day basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date. For instance, if the market value of securities of a mutual fund scheme is INR 200 lakh and the mutual fund has issued 10 lakh units of INR 10 each to the investors, then the NAV per unit of the fund is INR 20 (i.e.200 lakh/10 lakh). NAV is required to be disclosed by the mutual funds on a daily basis.Not sure which mutual funds to buy? Download moneycontrol transact app to get personalised investment recommendations.