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A Comprehensive Guide to selecting the best Mutual Fund

By Shlok Kamat

1st Apr 2022

3 mins read

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When was the last time you made a plan to execute a task to perfection? Was it last night when you set your bedside alarm for 5:00 a.m. to go for a brisk walk or was it last year when you were filling your taxes and decided to invest your income in claiming exemptions under the various sections of the Income Tax Act? Planning and execution is a lifelong skill and takes years to master. Investment is a similar skill that requires precise planning and execution. The decisions you take today have a significant impact on your future returns. The easiest way to ease this panning process is by investing via mutual funds. Here you put in your money in the hope to benefit from capital appreciation in the future.

People are misinformed that mutual funds investment requires no investor effort as the capital is managed by a highly qualified fund manager who has years of experience. Though the latter is often true, mutual funds require no investor effort is a marred concept. As Shikhar Dhawan keeps telling us in between overs, “Mutual funds Sahin Hai”; is he telling us the truth? Are all mutual funds worth investing in? This piece will help in deciding the same.

A mutual fund is a financial instrument wherein funds from many investors are pooled-in to form an investment product. The fund manager then invests across financial instruments to realise the fund's investment goal. An informed investor must keep the following points in mind before investing.

Identifying Goals and Risk Tolerance

Before investing, one must lay out their investment goals and gauge their risk-bearing capacity. All investments carry a degree of risk, and one must perform adequate due diligence before putting in their money. Risk and returns go hand in hand, and a proper balance must be maintained. Goals could range from long-term capital gains to saving up for college or buying a house, or maybe even planning for one’s retirement.

Investment Philosophy and Style

Investors have a wide range of mutual funds to choose from. There are growth funds for capital appreciation, debt funds for regular incomes, and hybrid or balanced funds that try to give the best of both. Income funds tend to give out regular dividends, whereas growth funds do not.

Fees

All mutual funds have a management fee, known as the expense ratio. It is often a percentage of your invested funds. It can range from as low as 0.05% to 3% depending on the type of fund. One must keep in mind that expense ratios eat up your gains. Some funds also have an exit load associated with them. Exit load is a penalty that investors must pay if they redeem their mutual fund units prematurely. The exit period varies from fund to fund, with some as low as a few days to some having a 36 month lock-in period.

Active v/s Passive Funds

Active funds have a fund manager who takes calls of periodic rebalancing of the funds' constituents. Managers do a lot of research on assets and consider sectors, company fundamentals, economic trends, and macroeconomic factors when making investment decisions. Active funds seek to outperform a benchmark index and attract higher expense ratios. Passive funds or index funds are funds that replicate a benchmark. These are great for investors looking for diversified investments since most indices are well diversified. Passive funds have very low expense ratios.

Fund House Reputation and Assets Under Management

Trust is difficult to have, especially when it involves your hard-earned money. The reputation of Asset management companies is another crucial aspect that investors must not overlook. Past performance of funds does not guarantee future returns; however, they give us a picture of how well the fund was managed in difficult times. Funds with significant Assets Under Management (AUMs) help instil trust and faith among first-time investors looking to gain exposure.

Bottom line

In a world where most investments are subject to market risks, investors must invest with extreme caution. Having a well balanced mutual fund portfolio comprising a mixture of Index, Debt and Equity funds is a great way to grow one's wealth. So the next time you see Shikhar Dhawan on television, you will know “Konsa Mutual Fund Sahi Hai! ”.

FAQs

Do all funds beat the benchmark?

Historical data suggests that more than 87% of funds miss beating the tracking benchmark. Professionals often offer index funds for passive investing and getting returns in line with the returns of the standard.

When should one start investing in mutual funds?

A famous Chinese proverb, “ The best time to plant a tree was 20 years ago. The next best time is now.” Start investing with Spenny now!

Should I stop my SIPs during a downtrend?

It would be unwise to stop SIP just because the market is on a downtrend. Downtrends are a great way to get more units at the same investment. A reversal is often expected soon, and a trend would start upwards.

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Copyright 2021 Spenny Fintech Pvt. Ltd.
Made with ❤️ in India