How to Choose the Correct Mutual Fund? Aligning Your Goals to Various Types of Mutual Funds
Innumerable mutual funds are available in India. Hence, understanding which one is right for you can be a daunting task.
Here are a few things that to look at to know if a mutual fund is right for you:
1. Define the risk profile
Different people have different kinds of risk profiles. In fact, the same person can have different risk profiles for different goals. You may not want to take much risk while investing your short-term funds, while for your long-term funds, you may not mind taking a risk to earn better returns.
Hence, take a look at the goal for which you want to invest your fund and decide the level of risk you want to take? This will define whether you should invest in equity or debt, or balanced funds.
During this step, you should also decide on the level of risk that you want to take. Let us suppose you have decided to invest in equity funds. Now decide how much risk you are willing to take? If it is less, then you may go with large-cap or bluechip mutual funds. However, if you are ready to take more risk, you may want to invest in mid-cap or small-cap funds or a combination of all these.
2. Historic performance of funds
Let us assume that you have decided to invest in large-cap equity funds because you do not want to take excessive risk. Again, a vast number of large-cap equity funds are available today. In some cases, the same fund house has multiple large-cap equity funds. This makes things confusing.
This is where you need to check the historical performance of funds. To do this, we suggest you look at a 3-years or 5-years time horizon rather than 1-year or less.
Looking at long-term performance will help you understand the consistency of the fund. A lot can happen in the market in a 3-year timeframe or even more. If a fund has been able to maintain its stability over the highs and lows of the market, it may continue to do so in the future as well. Check if they have outperformed the benchmark or at least have been at par – another major indicator of a fund’s steadiness.
3. Check the pedigree of the fund house
By investing in a mutual fund, at the end of the day, you are trusting the fund house to manage your money on your behalf. The decisions taken by the fund manager will directly affect your returns. Hence, it is important to check the pedigree of the fund house –
- How long have they been in the business?
- Are they renowned?
- Who are the promoters?
- Do they have good customer service?
Read reviews on online forums to understand the overall perception of the fund house.
4. Investment strategy of the fund
Read the offer document to understand the investment strategy of the fund you are considering. Understand where the fund plans to invest and what are its investment goals. It would be best if you also looked at how the fund plans to diversify its assets.
Another important factor is the time horizon of the fund and whether it matches your investment horizon. For example, if you have a fund that you want to invest for 6-months, a short-term debt fund will be ideal for you rather than a liquid fund.
Taking care of all these will help you align your goals to the right kind of mutual fund.