How To Choose Best Mutual Fund

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How to choose best mutual fund for investment?

Remember before choosing mutual funds that It is one thing that is going to help you achieve your future goals. These funds are there with you in good times and in bad. If you spend your time or money with the wrong company or with wrong mutual funds then you may face difficulties to achieve your dreams.

Did you think what safe investment options in india mean to you?

Meaning of safe investments and advantages to mutual funds is different for different investors. 

For one safe means safe investment with high returns and for another safe investment with good return at low risk, while few think that my money should grow even with market ups and downs.

Doing safe investment doesn’t only depend on the product you choose but it starts from the time you pick your product for investment. First you should understand your own risk profile, time of investments, financial needs and purpose of investment.

Then how to choose best mutual fund and safe investment options in india

  1. Avoid the rating trap because mostly it is sponsored
  2. Look at the AUM(Asset Under Management) of the fund
  3. Set your goals and understand your risk profile
  4. Quality of securities
  5. Long term performance
  6. Expenses percentage
How to Choose Best Mutual Funds

A best mutual fund is something which like designer clothes. It should be parallel to your risk profile and timing of investment. Here are some pro tips to choose the best mutual fund for safe and good returns.

1.Avoid the rating trap because mostly it is sponsored:

Being a smart investor you should always look at the star rating of the fund given by different mutual fund analysts, websites etc. But, this should not be the only parameter to decide which mutual fund should be chosen for investment. It’s very important to understand what those star rating as well as customer reviews.

Star rating is not only based on performance of the fund but also, it’s a comparison within the category. High rating doesn’t mean that the mutual funds with highest returns of the entire category. Like we have a ranking system in schools. The student ranked number one doesn’t mean that he or she is the best student in the world but in the specific class.

2.Look at the AUM(Asset Under Management) of the fund:

AUM(Asset Under Management) is a very important role in the growth of your funds. It follows diminishing marginal utility, which means, after a certain level of AUM(Asset Under Management) it starts affecting the fund performance in a negative way. Excess of money available with the fund manager makes it difficult to trade and which in turn affects the performance. Many times fund managers may hold excess amounts of cash because of lesser opportunities to utilize the capital.

3.Set your goals and understand your risk profile:

When we think about how to choose the best mutual fund, it’s about you need to know what is best for you and goal based mutual funds. One should understand their own requirement first. Just calculate when you need this invested money. What is the amount of returns that you need to achieve that goal? If you are investing without a goal, you are just sailing without any direction and may face trouble anytime. List down all your goals and requirements for the investment plan accordingly.

Always keep some amount aside for emergencies and contingencies. Understanding your risk profile is also very important while choosing the best mutual fund. Most of times Investors blindly invest in funds which occasionally perform well. They may not be aware such funds may have higher exposure towards small and mid cap which are very volatile and may not suit your risk profile.

Always Understand your risk profile and then go to take risk. A person with huge loans may be willing to take higher risk just to earn higher and clear his loans early but ideally he should take moderate or lower risk because of his financial commitments.

4.Quality of securities:

While selecting the best mutual fund for SIP or lump sum, it’s very important that you look at the quality of securities too. Investors always consider debt funds because there are no risk or low-risk mutual funds. However, sometimes there are various risk parameters that can affect debt funds also. Especially while selecting a debt fund one should always look at the percentage of allocation toward AAA or AA rated bonds. And it’s quite obvious that having higher exposure towards low-rated bonds will increase the default risk for the fund.

5.Long term performance: Which mutual funds are best for long term

The consistency of fund performance is very important. Investors generally look toward 1 year returns and start thinking that the fund is a winner, however, always look towards 3 to 5 years mutual funds for long term investment returns to understand how consistent the performance is. For example a fund that has lasted 1 year has given 15% returns and 3 year returns is 4%, however there is another fund which has generated 12% last year and 3 year returns is 10%, which one will you pick?

It’s OK if the fund performance is a little lower than the occasional winner, always run behind the consistency of the mutual fund performance. Their occasional returns can be because of some market favorable conditions or because of a specific sector performing well. It will be rare for these funds to repeat the history, and however, the steady performing fund is always the winner.

Moderately high-risk level

These mutual funds with highest returns have good exposure in equity and related avenues. They are usually balanced and equity oriented, index, diversified and ETFs. Products under this label are best for investors seeking to create wealth over a long period of time. Investment under such funds is related to the large-cap segment.

6.Expenses percentage:

Be it a direct fund or a regular fund, the cost to manage the fund always exists. This cost will be adjusted in your profits, so always look towards the expenses ratio of a fund because you don’t want to end up paying more cost than your returns.

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