How To Select A Mutual Fund Scheme | Key Points To Remember
While investing in Mutual Fund, selecting the right mutual fund scheme is a key. There are a basket of Mutual Fund schemes available in the market be it Equity, Debt or Money Market schemes. Within equity also is a wide range of options like Large Cap Funds, Mid Cap Funds or Sectoral or Thematic Mutual Funds schemes.
However, one needs to select the mutual fund scheme that best suits one’s requirements.
Key Points to Consider while Selecting Mutual Fund Schemes
1. Performance Of The Mutual Fund Scheme
While selecting any mutual fund scheme it is important to review the performance of the fund. The key things that would determine the performance of the fund would be:
o Returns /Yields
The fund houses publish the performance of each fund scheme managed by them. Net Asset Value (NAV) is a key factor in Mutual Fund parlance. The movement in NAV is a fair indicator of performance of the scheme.
For long term investment, the investor needs to evaluate 3 to 5 year return generated by the scheme. It is also important to note that the return generated under the scheme needs to be compared with the performance of similar schemes managed by other fund houses as well as performance of the benchmark during the said period.
o Fund Manager
The Fund Manager is the ‘decision maker’ of all transactions done by the fund. The investor should therefore check the past performance of the fund manager and also the performance other schemes managed by him.
o Expense Ratio
All fund houses have to incur salary expenses for their fund manager, employees and also distribution expenses for their mutual funds. These expenses are ultimately charged to the investor’s whose funds are managed.
Typically, larger the Assets Under Management (AUM), lower is the expense ratio. The investor should also check the Exit load (charges levied on redemption of mutual fund units) under the scheme they want to invest.
2. Risk Appetite Of The Investor
There are mutual fund schemes available for all kinds of investors in the market. Mutual Fund investments are subjected to risk with no assured returns. The risk appetite of the investor goes a long way in deciding the Mutual fund scheme that the investor should choose. Depending on the risk appetite the investor can select the schemes as follows:
o High Risk Investor
A young investor or a Middle aged salaried professional would typically have a high risk appetite and can opt for investment in purely Equity linked Mutual Fund Schemes. These schemes are generally high risk -high return schemes suitable for these kind of investors.
o Low Risk Investors
Retired people should opt for schemes which have a moderate return but a lower risk. Debt mutual funds or Balanced/ Hybrid mutual funds (equity and debt mix) best meet their requirements.
3. Time Horizon Of Investment
The other key factor in deciding the scheme would be the time horizon.
o Shorter Time Duration
If you intend to park your funds for a short period of time say six months to a year, debt mutual funds or money market schemes are a good option.
o Longer Time Horizon
The longer the time horizon the better. If the investment is to meet long term goals open ended equity mutual fund schemes should be opted for.
4. Purpose Of Investment
Goal setting is an important step in financial planning. The purpose of investment needs to be understood before selecting the scheme:
o Long term goals like higher education, marriage of kids
In case the goal is to save for your child’s higher education or marriage you should opt for aggressive equity linked schemes which would generally give desired returns in a long time period.
o Tax Savings
Mutual Fund investment is an effective way of tax saving. There are various Equity linked savings schemes (ELSS), investment in which is allowed as a deduction under section 80C of the Income Tax Act. Thus, it serves a dual purpose of tax saving and return generation.
- Also Read – 5 best ways you can save tax in India
o Regular Income
Retired investors need a regular flow of monthly income. Mutual Fund schemes offer two options under any fund scheme- Growth and Dividend. Under the ‘Growth’ scheme there are no payments made to the investor inspite of increase in NAV.
However, under the ‘Dividend’ scheme dividend is declared under the scheme on a regular basis and paid to investors. The people desiring a regular flow of income should opt for the ‘Dividend’ scheme.
Thus, there are various mutual fund schemes made available by the Mutual Fund industry and the investor has to choose the one best suited for him. Do consult a Financial Advisor before investing. He/She may be able to understand you and your needs and give you a proper solution.