Your money: A six-step guide to selecting the right mutual fund scheme

© Provided by The Financial Express
Mutual funds are supposed to invest in strict adherence to the investment mandate.

By Karan Batra

Mutual fund investments can be an excellent strategy to diversify your portfolio and reach your long-term financial objectives. But with so many options available, it can be challenging to choose which mutual funds are best for you. Knowing what to consider can help you make the most informed decision possible.

Investment objective

When reviewing mutual funds, start by considering your investment objective. Risk tolerance and time horizon will help you to determine which mutual fund may best suit your needs.

Performance history

Next, examine the fund’s historical performance. Has the fund exhibited consistent long-term performance, or has it seen a few great years followed by years of underperformance? It’s important to understand how the fund has performed in different market environments.

Adherence to investment mandate

Mutual funds are supposed to invest in strict adherence to the investment mandate. However, in different market conditions, fund managers might get tempted to tweak their strategy to generate potential returns. While choosing your fund, put emphasis on the manager who sticks to the mandate and does not change his investment style often.

Risk and portfolio strength

Before investing, examine the fund’s risk profile. While there’s no such thing as a risk-free investment, some funds are less risky than others. The investment objective and fund volatility would be a good place to start. However, one must also study the quality of the underlying portfolio.

Investment costs

Make sure to investigate the associated investment costs. Some funds are actively managed and come with higher fees, while others may be passively managed and have lower fees. The fund should be able to justify its cost, so if a fund charges high fees for active management, it should be able to deliver superior performance, else a passive fund might be better. Over the years, very few large-cap fund managers have been able to outperform the market and the trend of alpha across fund categories is shrinking.

Tax considerations

As you research mutual funds, consider how the options might affect your taxes. The holding period and tax computations are different for equity and debt-oriented funds and there are set-offs available against your overall portfolio.

These are a few considerations to keep in mind while selecting a mutual fund. Choosing the appropriate mutual fund is not a simple task, but by considering the above factors, you can make an informed decision and invest with confidence.