How to Select Mutual Funds

While investing in a mutual fund, you would be confused to see the sheer number of schemes available! So, how do you go about selecting the right mutual fund for your investment needs? 

Parameters to select a good Mutual Fund Scheme are:

Identifying investment goals and objectives 

• Before investing in any fund, identify your financial goals for which the money is being invested e.g. retirement, child’s education / marriage, vacation, etc.

• The time zone for your investment is equally important, if you are retiring in, say 5 years as compared to 25, your investment approach will be different in both cases.

• Identifying a goal and the time horizon for the same is important because it will enable you to cut down the list of schemes of mutual funds available in the market, as you will choose a scheme that satisfies both the objective and the time horizon. 

• Also check whether the fund’s investment objective mentioned in the offer document is aligned with your investment objective. 

• If all these criteria are satisfied then can shortlist the Mutual Fund schemes. Re-check you calculations since you will be parking your hard earned money! 

Identifying risk appetite is as important as identifying a goal.

After short listing the schemes and before investing, it is advisable to check your risk appetite. This factor helps you invest in the right scheme enabling you to achieve your financial goals. 

Other Factors:

Expense Ratio

• Expense ratio is the measure of what it costs to an Asset Management Company to operate a mutual fund.

• Remember, a higher expense ratio results in high cost for the long term investor. 

Low Portfolio Turnover

• Portfolio Turnover Ratio (PTR) is the measure of how frequently assets within a mutual fund scheme are bought and sold by the managers. 

• In other words, it numerically measures the trading activity in a mutual fund scheme’s portfolio. 

• The higher the portfolio churning higher will be the transaction costs in the mutual fund scheme. 

• This will have a further impact on the amount you have invested in the mutual fund scheme. 

• Therefore, always consider Portfolio Turnover Ratios before deciding to invest in a mutual fund. 

*Mutual Fund investments are subject to market risks read all scheme related documents carefully.