So are you one of those new investors, wary of the fluctuations and unpredictability of the stock markets, considering the Mutual Fund (MF) route?
MFs are no doubt a better option for new and risk-averse investors, who are not well-versed with the functioning of the stock markets. As most of us may be aware, an asset management company (AMC) or a MF house typically functions by accumulating the funds of investors, and employing their expertise for investing in diverse securities, in accordance with the investment philosophy and objectives of the fund house.
Now the big question that would arise in the mind of the investors is, “How to choose the right fund?” An ideal fund would be the one which offers you a decent return in the long run, without losing much of its value. The checklist below will help you select the ideal fund that caters to your financial needs and objectives.
Investment Goals: Setting up investment goals, is the first and foremost step. Your entire effort to choose the right mutual fund will be futile, in the absence of well-defined investment goals. You must consider factors like your risk appetite, the reason for your investment, how long you can remain invested, at what stage you can re-allocate and the like, before you make your first investment.
Fund House Objectives & Investment Philosophy: While going about selection of the mutual fund, one should try to match the objectives and investment philosophy of the mutual fund, with your investment goals. You need to figure out if the mutual fund objectives would cater to your investment needs.
Fund Manager Profile: Review the profile of the fund manager of the AMC you are considering for investing your money. He plays a crucial role in the asset management company, and is backed by a team of managers, economists, analysts, statisticians and IT systems. The fund manager along with his team, analyses the economic condition of the country, the securities that may perform well in the prevailing economic scenario, and then invest in the desired securities, that meet the objectives and philosophy of the fund house. The fund manager with tenure of three to five years or over is considered ideal for the purpose of selecting the fund.
Past Performance: The past performance of the fund should be considered with caution. One cannot assume from the past performance that the fund will continue to yield the same returns in the future. So do not choose a fund just because it has done well in the past. Try to study the long-term performance of the fund through various phases of the market and make your inferences based on that.
Expense Ratio: It represents the per unit cost that is incurred for managing the fund. It is the ratio of the total expenses incurred by the fund, which includes the management fee, operating expenses, marketing and distribution fee, divided by the assets under management. In case of multiple funds in the same category, go for the one with lower expense ratio.
Using Standard Deviation technique: It is a measure of the deviation of the actual performance of a fund, from the average performance over a period of time. The risk associated with a fund may be ascertained by this technique. The risk associated with a mutual fund is seen in the volatility of the performance and standard deviation is used to measure the volatility of a fund. If a fund has high standard deviation it implies its performance is very volatile. Hence while comparing the performance of two funds; you should opt for the one with lower standard deviation, which would indicate the fund will not experience extreme highs and lows, and its value will continue to grow gradually. So collate all the relevant data for the all the mutual funds that your wish to consider, and zero down your search for the right fund, based on the factors discussed above.
Also a final word of advice, quoting the Mutual fund pioneer and renowned philanthropist, Sir John Templeton, “Start with a prayer, it helps!”