Selecting a Right Mutual Fund: Are you wondering which mutual fund scheme you should invest in? Whether you are a novice or an experienced investor, a thorough research is required.
But selecting a right mutual fund is much easier than you think. These pointers will help you choose the right mutual fund scheme to invest in.
Identify Your Goals and Risk Tolerance
Before investing in any fund, you should identify your financial goals. What is important for you – long term gains or regular income? You have to decide whether the returns you get will be used to pay for college expenses of your children or fund your retirement, both of which are decades away or be used to plan a holiday or fund the purchase of a new car a few months down the line.
Each fund has a different approach and goal. Identifying a goal is an important step in choosing from the plethora of mutual funds available to investors.
Moreover, investment in securities always comes with certain risks; risk and return are directly proportional. Therefore you must also consider your desire for returns against your ability to withstand risk: are you capable of withstanding dramatic swing in portfolio value or, is a conservative investment more suitable?
You can measure the performance by referring to mutual fund websites or you can contact any investor forums that discuss mutual fund investments. In addition, the star-ratings of mutual funds help narrow down your field of choices. For instance, you can avoid the funds which have a long-track record of poor performance or funds which show dramatic swings as they may be riskier than you expect.
However, past performances demonstrate little correlation with future success. While having the foresight about future performance is next to impossible, measuring past performance is very straightforward; you can measure the average annual return of the funds. The Mutual Fund Evaluator lets you figure out funds by quintile of performance for the last three years.
Charges and Fees
Mutual fund companies make money by charging fees to the investors. So you must consider different types of fee associated with an investment before you make a purchase.
There are two types of charges commonly applicable on mutual funds nowadays – exit loads and expense ratio.
Exit load: Exit load is a fee charged from investors for exiting a scheme or company as an investor. It is aimed at reducing the withdrawals by investors from the scheme of mutual funds. Currently for equity funds, it stands at 1% for funds withdrawn before 12 months from the date of investing.
Expense Ratio: The expense ratio is the ongoing cost to operate the fund. The cost includes the fee paid to portfolio manager, distributor, recordkeeping, taxes, legal expenses, and accounting and auditing fees.
Evaluate the Portfolio Manager
You must understand the ability of the fund manager to deliver the results that are consistent with the general market returns under certain conditions i.e. he must be able to generate additional returns or alpha over the index returns under any conditions.
Fund managers who consistently beat market returns by giving above average returns are considered as star performers in this field.
There are many other factors you may want to consider, but doing a little research and understanding your financial goals and risk tolerance will help you a lot. Efforts and profound diligence will increase your chances of success.