Due to their attractive returns and diversified portfolios, mutual funds are now the preferred choice among investors. However, as an investor, you must remember that no single system or set of systems is suitable for everyone. The right mutual fund plan for an investor is one that suits, among other things, his investment objectives and risk tolerance.
Selecting a mutual fund requires two steps: selecting a mutual fund category and selecting a program within that category. Here are the factors that investors should consider while choosing a mutual fund scheme:
Factors for choosing mutual fund category
1) Investment purpose
An investment objective is a financial goal that an investor wants to achieve by investing in an investment fund. The investment objective can be any short-term or long-term financial desire of the investor, such as buying a house or car, funding a child's higher education, vacation, retirement, etc.
2) Time axis
Term refers to the period during which an investor wants to invest their money in a mutual fund. It can last for just one day or it can last for five years or more. Different fund categories are best suited for different time periods. This is because some funds invest in short-term bonds while others invest in long-term bonds. If you have an investment horizon of five years or more, you should ideally choose an equity fund.
3) Risk tolerance
Risk tolerance is the amount of risk an investor is willing to take on invested funds. In 2015, SEBI made it mandatory for all mutual funds to report a risk meter consisting of his five levels of risk associated with invested funds. The five risk levels are low, medium-low, medium, medium-high, and high. The table below shows the best fund categories for different risk levels and time periods. Factors to choose the best mutual fund scheme
After selecting a mutual fund category based on your investment objective, time horizon, and risk tolerance, select a mutual fund plan within that category based on the following factors:
1) Performance compared to benchmarks
Mutual fund benchmark indexes are standards for comparing mutual fund performance and stock allocations. Benchmark indices guide the system's investment philosophy. Therefore, the benchmark index's asset allocation should be consistent with the system's investment objective. For example, the benchmark index for a large-cap mutual fund should be a large-cap index, and the benchmark for a mutual fund focused on bank stocks should be a banks index.
SEBI has also made it mandatory for mutual funds to use a variant of the Total Return Index (TRI) as a benchmark. TRI is based on the assumption that dividends are reinvested in a mutual fund upon declaration. In other words, it is an account used by companies to declare and pay dividends. This makes it a better benchmark than the regular price index (PI).
2) Performance and Categories
Another equally important factor when choosing a mutual fund is its performance relative to its active peer group. This helps provide a comprehensive understanding of the fund's performance. This comparison should only be made between mutual fund schemes of the same type. For example, large-cap mutual funds can only be compared with other large-cap mutual funds and not with mid-cap funds or debt funds.
3) Consistency of performance
A good mutual fund can generate not only stormy returns but also consistently good returns for investors over a long period of time. The fund must be able to generate consistent returns during both bullish and bearish periods of the stock market.
4) Fund manager experience
Another important factor to consider when choosing a mutual fund is the performance of the fund's manager and the length of time the fund's manager has been at the helm. To do this, investors should consider the fund manager's experience with the fund and other funds it currently manages or has managed in the past.
5) AMC performance
An asset management company (AMC), also known as a fund house, is a company that manages investment funds. For example, HDFC Mutual Fund is the name of the AMC that manages funds like HDFC Shares, HDFC Top 100, HDFC Small Cap Fund, etc. Many decisions are made at his AMC level by the AMC's Chief Investment Officer (CIO). Because the selection was made at the AMC level, incorrectly selected inventory often exists in multiple systems in the AMC. Therefore, it is important to check the track record of AMCs while choosing a mutual fund scheme.