How to Choose Mutual Funds?

When selecting a mutual funds scheme, you can use various parameters to determine if you're parking the money in the right product. These include:

• AMC track record
• Expense ratio
• Investment goals
• Fund performance
• Fund manager's experience

Let's take a closer look at each of the parameters below.

1. Investment goals

Firstly, identify your financial objectives for the investment, whether it's for travel, buying a new car, or others. This will help you understand how to choose mutual funds that best suit your targets and finances.

Once you have defined your investment goals, you will find it easier to navigate the market and zero in on the right scheme. Doing so will also help you decide on suitable risk tolerance and the type of funds you want in your portfolio. 

2. AMC track record

Looking at the Asset Management Company's track record can dispel your confusion regarding how to choose mutual funds. India is home to many AMCs, so it's inevitable to feel overwhelmed when you're spoilt for choices. Since a typical investment horizon for a funds scheme spans 7-8 years, you want to make sure your investments will get profitable returns.

So, when you compare fund houses, consider factors like investment strategy and fund managers' performance. A proven track record will make for a sweeter deal.

Additional Read: Mutual Fund Trends to keep an eye on in 2021

3. Expense ratio

The next time you're stuck on how to choose best mutual fund, pay attention to the fund's expense ratio. That's because it indicates the total cost of investing in a fund, including charges levied by the fund house for the management.

As a thumb rule, you should go for fund schemes with a lower expense ratio as they provide higher net returns. 

4. Fund performance

There are two kinds of fund performances you need to look at:

• Performance against benchmark

It evaluates a fund's performance against a standard or index. So, say fund A outperforms the benchmark by 2% and fund B by 4% in the same category, then you should choose fund B for investment.

• Performance against category

It measures a fund's performance in comparison to the performance of similar types of fund schemes. For example, if you're interested in a debt fund scheme, you should compare it to other debt funds and not large-cap funds.

Additionally, consider the consistency of fund performance to get a holistic overview of its lifecycle. This practice will also help you understand how to select mutual funds for sipor ELSS (equity-linked savings scheme) if you're interested in specific schemes.  

5. Fund manager's experience

When you put your hard-earned money on the line, it's only prudent to make sure you're leaving it in responsible hands. To that end, you should look at a fund manager's past track record to determine if they have the expertise to get you the returns you want.  

Also, review the funds the fund manager oversees to get a low-down on how they make changes to the portfolio as the market dips and rises.

Additional Read: What kinds of investors should opt for mutual funds?

Over to you

Looking for a smart way to invest in equity funds? Just download Tata Capital's Moneyfy app. Use it to compare different schemes or identify leading fund houses. It also offers critical insights on how to select the best mutual funds and make the most of your investments. So, why wait? Get the app here.