By now, it’s an open secret that prudent investments in mutual funds can aid you achieve your financial goals. The swelling number of mutual fund investors over the years and rising folios are a testament to the popularity of mutual funds, similar to equity trading. However, it’s a common question among investors as to how to choose the best fund for investment for a particular goal. Let’s find out.
Choosing the Best Fund is a Culmination of Multiple Factors
Be it accumulating funds for your child’s higher education or retirement, making a downpayment for your dream home, or saving for that much-awaited international vacation, zeroing in on the best fund warrants considering multiple factors. These include:
A Knowledge of Your Financial Goals
Before you get down to choosing the best fund, it’s crucial for you to have a holistic knowledge of your financial goals. What do you seek to achieve from your investment? Is the goal short-term or long-term?
Answers to these can help you opt for the right fund category. For instance, if your goal is to build an emergency corpus within a few months or a year, you can opt for liquid funds, a category of debt funds.
On the other hand, if your goal is to accumulate funds for your golden years, i.e., retirement, you can opt for equity funds. Similarly, for medium-term goals, which are around 3 to 5 years away, you can invest in hybrid funds.
Know Your Risk Tolerance
Risk tolerance is your ability to stomach risks. Before zeroing in on the best fund, you must accurately estimate your risk appetite. Though all mutual funds are subject to market risks, the level of risk differs across fund categories.
For example, equity funds are riskier compared to debt funds. Even within fund categories, the quantum of risk varies. You can know a fund’s risk through its riskometer. Ensure the fund’s risk matches yours.
The Fund’s Long-term Returns
It’s common for investors to opt for funds offering stellar returns in the short term. However, instead of this approach, you should ideally look at the fund’s long-term returns, especially for long-term goals. See how the fund has performed over a period of 8 to 10 years and how consistent the returns have been during this time.
This is because markets are non-linear and follow a series of crests and troughs. A complete market cycle can take quite a few years, and analysing long-term returns can help you better understand a fund’s performance.
Here too you need to pay special attention to the fund’s performance during the bearish phase because in a bull run even laggards tend to perform well. From an investor’s perspective, you should invest in a fund that has offered consistent returns over the long term.
Compare Returns With the Benchmark Index and Peers
This is another essential consideration. To choose the best fund, evaluate its returns against its benchmark index. A benchmark index is a reference point used to compare a mutual fund’s performance.
Benchmark indices differ across funds, the information of which you will find in the fund’s factsheet. Nifty 50 and BSE Sensex are the common benchmark indices. If a fund has delivered returns above the benchmark index, it’s said to have outperformed the index.
On the other hand, if a fund’s returns are below the index, it’s said to have underperformed. The best fund is generally the one which has delivered returns equal to or higher than its benchmark index constantly. Equally essential is to compare a fund’s returns with its peers in the same category to evaluate its performance.
Check the Fund’s Expense Ratio
The expense ratio is the fee charged by asset management company (AMC) for managing your investments. AMCs charge expense ratio to manage various operating and marketing expenses. Prior to investing, take a close look at this ratio.
This is because a higher expense ratio can significantly reduce your gains in the long run. Also, the expense ratio is collected irrespective of whether a fund is performing well or not.
To keep the expense ratio in check, you can invest in the direct variant of a fund through a stock market app. As AMCs don’t need to pay commissions to intermediaries in the direct variant, they have lower expense ratios than their regular counterparts.
Check the Fund Manager’s Track Record
A mutual fund’s success depends heavily on the fund manager’s skills, expertise and experience. The calls made by the fund manager and his team on stock picking, buying and selling influence a fund’s performance. When you put money in the best fund to achieve your goal through a stocks app, evaluate the fund manager’s track record. A seasoned manager’s record reflects on the fund’s performance.
Check the manager’s tenure not only in the industry but also with the fund in question. Long tenure with the fund can help you evaluate how the manager has navigated during bull and bearish phases. On the other hand, a high turnover can result in shifts in the fund’s investment strategy, which can affect its performance.
Conclusion
Keeping in mind the above factors can help you zero in on the best mutual fund to accomplish your goals. Remember, your mutual fund investments shouldn’t be static. Review your investments regularly to ensure you are on track to achieve your goals.
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