10 Things You Need To Know While Choosing Your MF-PART I

Investors looking to identify best performing mutual funds often look at the returns as the most important parameter. Investors need to study which mutual fund scheme suits the investor’s risk profile the most and then select the fund for investing. Following are the 10 things one must pay attention to while choosing a mutual fund scheme: -

1.Investment Goal :- Single most first step is to have an investment goal. Purposeful investing experience is crucial and one should know in advance how long he or she will be invested in the market. 

2. Theme selection :- Never have opportunities fund, International funds, sectoral funds , contra funds, etc.,as a staple part of your portfolio. A fully diversified equity oriented mutual fund should form the majority of your portfolio.

3. Performance evaluation :- It is extremely essential to identify a good performing mutual fund correctly. Novice investors mostly overweight the recent out-performance and ignore the risk adjusted returns. Higher the risk adjusted returns, better a fund is. In simple words we need to identify those mutual fund schemes which are generating higher returns per unit of risk and not only those funds which have generated higher returns.

4. Consistency:-  Investor needs to study the performance of the fund in up market condition and also in the down market conditions. A truly outstanding fund will normally show out-performance across the market moods.

 

5. Expense ratio :-  For investors there should be no doubts that lower the expense ratio , better it is. Usually those mutual fund schemes where the assets under management are huge will have lower expense ratios. Investors can bet on those funds , given other parameters are examined , with higher AUM as these funds tend to have lower expense ratios.

6. Fund manager experience:-  Enough attention to the fund manager’s experience and track record is of paramount importance. What is the style of fund manager and what is his unique skill set that differentiates him from the crowd can help investors in making investing decision. For example , if the fund manager specialiss in picking growth stocks  and investor is looking for a mutual fund scheme whose style is more inclined towards value investing then clearly that fund can be avoided whose fund manager specialises in growth investing. 

7. Scheme asset size :-  Investors are well advised to invest in those funds only where the assets under management are high and at comfortable levels. Problem with schemes which have less assets under management is that investors may never know if any single investor withdraws sizeable amount from the fund which may adversely impact the performance of the fund.

8. Portfolio Turnover ratio :-  Higher the portfolio turnover ratio higher will be the cost for investors. Investors may choose those funds with similar risk adjusted performance and lower portfolio turnover ratio.

9. Asset allocation: -  Investors may choose to invest in multi-cap funds which invest in quality companies across capitalisation. This way the asset allocation needs are to an extent taken care of. Investors can make a mistake of investing in Mid-cap funds or Small-cap funds ignoring the large-cap funds which may prove costly.

10. Time horizon :-  Investors should consider mutual fund investing for long run and avoid taking a short term view on the mutual fund investment.