How to choose the best mutual fund

 

Choosing mutual funds is not an easy task for many investors. Several categories of mutual funds, fund houses, and schemes are available. The best way to start this is for you to work on the right fund with thought and planning. While researching the best mutual funds to invest in, most new investors look at past performance. To select this, there are five areas that you need to evaluate to determine if a particular fund is a good investment. In addition, mutual fund investment is a long-term relationship. Unlike a direct investment in shares, where people can convert stocks rapidly, mutual funds are a long-term commitment. Most people keep investing in themselves for 8-10 years. Therefore, it is important that you choose the right fund and do not get entangled in such a fund which can result in losing both time and money.

 

Read the offer document carefully: One of the most comprehensive documents that each mutual fund provides is its offer document (also known as a prospectus). The first and perhaps the biggest step when choosing a mutual fund is to read the offer document carefully. The offer document contains all the important details about the mutual fund such as its purpose, plan type, past performance, details about the asset management company, information on underlying assets and more. In short, start your research by reading the mutual fund proposal document. Furthermore, these documents are not really difficult to understand.

 

Combine the purpose of the fund with its investment objective: Every mutual fund has a specific objective. And depending on the objective, they decide different factors such as asset allocation (equity to bond weight), risk, dividend payment, tax benefit, theme or sector focus, etc. You need to read the fund's offer document and identify carefully whether the fund's objectives meet your investment needs in terms of the above factors. If the objectives are not relevant to you, then it may not be a good option to invest in those funds according to your investment goals.

 

Performance: Performance comparison should only be used for the same type of fund. Otherwise, it makes no sense. Two important factors must be examined before selecting any fund such as whether the purpose of the fund matches your investment goals and what are the various risks associated with the fund.

 

Portfolios: Portfolios can be a bit difficult for those who have no knowledge of investments. Nevertheless, analysis of portfolios and holdings gives you a general idea of the securities in which the fund is investing. You can find out which company the mutual fund is investing in.

 

Risk: Almost all investments are risky, at least those investments that give you any meaningful returns. The true measure of risk is whether a fund is able to give you the kind of return that justifies the risk it is taking. However, measuring returns is not so easy. A variety of statistical techniques can be used to measure this.

 

Check fees and exit load: A mutual fund charges a fee for offering services and meeting various expenses such as manager's fees, operating and administration costs, advertising costs and more. Generally, for active funds, this expense ratio can be up to 2–2.5%. In addition, some mutual funds may impose deferred sales fees when you invest (entry load), or when you sell your shares (exit load).

 

Check the size and credential of the fund house: Always invest in a fund that has already established a good track record. It is important that fund houses have strong credentials as mutual fund investment is a long-term relationship and you do not want to associate with a troublesome fund house that will give you a headache in the coming years.