How to Pick the Right Mutual Fund for Yourself?

Posted by Shaheen Shaikh on May 29th, 2021

Once you have decided to invest in mutual funds the next step is to choose the type of scheme in which you wish to invest following by which scheme to put your funds in. And all this is dependent on the approach to investment - whether you wish to invest a lump sum amount or go for a disciplined style of investing. You also need to know how much risk you are willing to take or what is your risk tolerance level.

The right mutual fund is the one that matches your risk profile and allows you to achieve a set financial goal over a period of time. You also need to look at a fund’s past performance record, its management team, and expense ratios and choose the one that matches your investment strategy.

Questions to Answer

Here are some questions to address before choosing a mutual fund:

• Goals: Are you looking for wealth creation or tax-saving or a steady income in the form of dividends? What is the purpose of your investment? Your investment goal is to plan for retirement or fund your child’s education in the next few years.
• Risk Tolerance: Are you willing to risk investing in a scheme that invests in equities and so there are lots of ups and downs? Or are you a conservative investor who does want to take any risk and thus wishes to invest in a mutual fund that invests in instruments that generate steady returns?
• Liquidity: Are you willing to invest for a long period and reap the benefits of compounding or are you looking to offload your investments soon. Here you will have to choose between liquid funds or equity mutual funds that reap good rewards over the long run.
• Mode of Investment: Are you looking to invest a lump sum amount or wish to go for a systematic investment plan or SIP wherein you can invest a small pre-decided amount weekly, monthly, quarterly, or six-monthly.

Comparing Options

Once you are clear about your investment goals, risk profile, and the duration for which you wish to invest, you need to compare the various options available on the following fronts:

• Investment Strategy of a Fund: You need to compare the investment strategy of a fund with your investment approach.
• Performance of the Fund: You should look at a fund’s performance not in the short-term but over a reasonable period. This will provide you a better view of the fund’s performance during different market cycles. Also, check the performance details of the fund manager and the fund management team.
• Expense Ratio: Compare the expenses ratios which refer to the commission or the fee charged by the mutual fund from you for managing the fund investments. Go for a fund that has a lower expense ratio and higher assets under its management.
• Entry and Exit Load: This refers to fees charged by the mutual fund company when you invest or exit from a scheme. Compare and choose the ones with the lowest or zero entry and exit load charges.
• Taxation: Look at the taxation aspect of your mutual fund investment. The returns you’re your investment in equity mutual funds are taxed based on the period of holding and the applicable tax rate. Similarly, check the applicable rules for investing in debt funds.