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Key criteria one should apply while choosing a mutual fund to invest in

Key criteria one should apply while choosing a mutual fund to invest in

07 Aug 2021

Investing in a mutual fund requires some effort, patience, and risk appetite. Besides growing wealth, mutual funds offer various benefits, such as diversification and asset allocation to investors, and that should be taken into consideration while choosing a mutual fund plan.

Picking the right mutual fund may look easy, but it cannot be done without following certain basic criteria. Before investing in any fund, you must first identify your goals for the investment. Identifying a goal is an essential step before you get down to scour the mutual fund universe for the right product.

Risk and return are directly proportional. So, one should balance the desire for returns against one’s ability to tolerate risk. Besides, a potential investor must decide how long s/he plans to hold the fund.

  • Investment objective and style

There’s an objective that every mutual fund, without exceptions, follows. That objective can help investors to determine which product can help meet his investment objective. As for the investment style, you can choose from among largecap, midcap, smallcap, microcap, multicap and flexicap funds. As an investor, one should also look at the investment strategy of the fund. Most investors ignore this aspect while investing in mutual fund, but it is critical for the success of your investment portfolio. It is the approach that guides all the investments and holdings of a scheme. If the investment strategy of the fund house is not in line with your investment goal, then a conflict of interest may arise.
Looking at how the fund manager has performed versus its benchmark in the past. This can indicate what has been his/her track record as a stock picker. Investors should review various portfolios that the fund manager held and how often s/he churned them. This should give a good idea about the fund manager’s proficiency.

  • Experience of the fund manager

This plays a significant role in generating returns. Before investing in a mutual fund, as a smart investor, one should know about the fund manager and his/her past track record. Actually, the fund performance is largely impacted by the fund manager’s expertise and tenure.
The expense ratio is another critical factor to consider while investing in an equity fund. The higher the expense ratio, the more it takes away from what your fund earns. The expense ratio comprises brokerage fees and other costs that the mutual fund houses charge from investors.

  • Ratio and performance analysis

One needs to compare the risk and performance of different schemes within the same fund category by matching average returns, Sharpe Ratio and Tenor Ratio and Standard Deviation. The measure the exposure of risk and alpha generation capability of a fund vis-a-vis risk and the average returns.

  • Entry & Exit load

Entry & exit load are another cost that you directly bear. Entry load refers to the fee charged by fund houses from investors when s/he starts investing in a mutual fund scheme. Exit load refers to the fee charged by fund houses from investors upon exiting a scheme. It is a fraction of the NAV that you receive and, thus, leaves a hole in your investment value. As an investor, one must look out for mutual fund schemes that have zero or minimal entry and exit loads. Exit load often comes into play in case of selling units midway through. But investing for the long term is always beneficial to reap good returns from any mutual fund.

Selecting a mutual fund is crucial to the overall success of your investment portfolio and achieving set objectives and goals. It may seem like a daunting task, but doing a little research and understanding your objectives can make it easier.

With so many options in hand, one is bound to get confused as to what to pick and what not to. But if one follows the right process keeping all the relevant factors in mind, it should not be very tough to choose the right mutual fund that can best suit your investment requirement.

(DK Aggarwal is the CMD of SMC Investment and Advisors)