What is the Parameter and Criteria to select a Mutual Fund?
Investing in a mutual fund requires patience, perseverance and risk appetite. For any investor, choosing the right mutual fund looks easy, but it cannot be done without much effort and experience. The best mutual funds are the one which meets your financial goals along with giving good returns. But investor often gets confused with the fleets of option available in the market today. The biggest mistake that mutual fund investors make is selecting a mutual fund based on past performance. Apart from taking advice from the mutual fund advisor, an investor must look for various parameters and criteria to select a mutual fund. Here are certain parameters to look before selecting a mutual fund
1) Investment Objective:
Any investor first needs to identify the purpose of investing. Investment objective must be long, short or linked to any occasion. As an investor, it is imperative to check the investment objectives of the respective mutual fund scheme and check whether it suits your objective of investing or not.
2) Fund Manager Tenure and Experience:
Before investing in the fund, it’s better to evaluate the performance of the fund manager. Although it’s a performance-oriented approach, the role of the fund manager is quite important. He/She is the one who is going to be a key component in your search for the best mutual fund to invest. That’s why it’s experience and viewpoints count a lot. In case, if you find that due to changes in the fund manager, there is a considerable effect on the fund’s performance, you may decide to exit.
3) Expense Ratio:
The expense ratio is one of the key parameters to look upon before selecting any mutual fund. A mutual fund house also incurs an annual expense to run its business. The expense ratio is the percentage of assets that go towards these expenses. This means high expense ratio will impact the fund’s returns.
4) Performance Ranking:
Before selecting any mutual fund, Investor should look upon its ranking among the peers. Ranking will able to give you a clear understanding of the best performing mutual fund in the market. To find out the ranking, an investor needs to find out the quartile ranking, which shows how the fund performs quarter to quarter among its peer group. An investor must select those schemes which have remained in top quartile most of the time.
5) Investment Style:
If you look upon any small or a big investor, they have a unique investment style to generate consistent growth returns. To avoid losses or hedge their position against any losses, it’s better to generate a unique investment style. Depending upon the risk appetite investor needs to decide their style, i.e. active or passive. Further, depending upon the risk appetite the investor can structure their mutual fund portfolio, whether they want to invest in large cap, mid cap or small cap.
6) Exit Load:
An exit load refers to the fee Asset Management companies (AMC’s) charge to their investor at the time of exiting the scheme. It is higher for short duration and lowers for long durations. So, it’s imperative that you invest in a fund with a low exit load and more importantly remain invested for a longer duration. Even though the exit load is a fraction of the NAV, but it eats your investment value.
Disclaimer: Mutual fund Investments are subject to market risks. Please read the scheme documents carefully before investing.