Now that you have decided to invest in Mutual Funds, now it is important to pick the best Mutual Fund for you. The best for me does not mean the best for you, therefore it is important to identify first what you need and then after you will able to decide the best Mutual Fund for you.
1) Identify your Investment Needs
The first towards picking the Best Mutual Fund for you is to identify your Investment needs and Risk Appetite.
Investment Needs means the Goal you want to achieve, your time horizon i.e. the period of investment and risk appetite means the amount of risk you are willing to take to achieve your goals.
Before investing it is important to identify yourself and then invest in Mutual funds which are in line with your investment goals and time horizon.
2) Mutual Fund Investment Style
After Identifying your Investment needs now it is important to select the fund which matches your investment style.
You can select from a wide of range of portfolio such as Large Cap, Mid Cap, Small Cap, Sector Funds, Thematic Funds etc.
This Table helps you to select the right type of fund as per your Investment Style and Risk Appetite. But we recommend you to not to invest in Sector or Thematic Funds.
3) Fund Manager and Asset Management Company
Probably the most important step to identify the Best Mutual Fund is to look at the Fund Manager and the Fund Management Company.
The Fund Manager is the person who manages your investment on your behalf and the Fund Management Company is the one who hires Fund Manager and takes money from you.
You should check the track record of the fund manager, how many schemes he manages, Since how many years he has been with the Fund House, Since how many years he has managed the scheme etc.
Similarly, you should look at the AUM of the Asset Management Company, Track Record, Schemes Managed by the Fund, No. of Years Since the AMC is actively managing the schemes.
4) Expense Ratio
Expense Ratio is the fee charged by AMC for managing your money. The Expense Ratio is charged as a percentage of the Investment Amount and it is deducted from the returns generated by the fund.
Expense Ratio directly affects your returns lower the ratio higher the returns and vice versa. Generally, you should look for a lower expense ratio in Mutual Funds to maximise your returns but this is not the case in all situations.
If a fund generates more returns than its benchmark and category you should not mind paying extra expense ratio than the industry.
5) Asset Under Management (AUM)
Asset under Management (AUM) means the amount of money the fund is managing on the behalf of its investors. AUM or the Size of the Fund is a very important criterion for selecting Mutual Funds.
Generally, you should look for Funds with Smaller AUM this helps in Managing the fund well. Once the fund grows too much the AUM becomes difficult to handle for the fund manager which affects your returns directly.
6) Asset Allocation and Sector Diversification
Asset Allocation Stands for Diversification of AUM into a various different class of Asset such as Equity, Debt, Bonds, Commodity etc. The Asset Allocation helps in minimising the risk by diversifying into various assets and helps in getting better returns as well.
Sector Diversification means in which sectors the AUM has been distributed by the Fund Manager. Ex of Various Sectors are the Financial Sector, Infra, Pharma, Hospitality, Chemicals, Telecom etc.
The fund should have a distributed AUM among various sectors in the industry. Being Sector focused increases risk of the underperformance of the sector and low returns for its investors.
7) Compare with Benchmark and Category
The Mutual Fund you are looking for should outperform its benchmark and category returns in the long term.
Benchmark is an index to which returns of the fund are compared. Different funds have different benchmark such as Nifty50, Nifty50 TRI, BSE Small Cap Index, BSE Mid Cap Index etc.
Category means the Average returns of similar type of funds in the industry. Mutual Fund should generate more returns than its benchmark and outperform in the long run.
8) Risk Analysis
This is an optional step but a really important one while selecting Mutual Funds. Risk Analysis stands for Analysing the Risks the Mutual funds with the help of statistical factors such as Beta, Standard Deviation, Alpha and Sharpe Ratio.
9) Invest in Direct Mutual Funds
Whenever you are investing in Mutual Funds you should always invest in Direct Mutual Funds. Direct Mutual Funds increase your returns by 1% yearly which affects the returns in the long run.
In Direct Mutual Funds, no commission is paid to any distributor or agent which is paid back to you in the form of extra returns which can increase your Final Corpus amount in the long run. So Always invest in Direct Mutual Funds and Say No to Regular Plans of Mutual Funds.
- Direct vs Regular Mutual Funds: Which one Should you Pick?
- How to Switch from Regular To Direct Mutual Funds?
10) Mutual Fund Review
You can also read Mutual Funds Review that helps you in deciding the best fund for you.
11) Passive vs Active Management
Still, After Analysis, you are confused to which funds to buy then you should look for Passive Funds for Investment.
Passive Investment means there is no role of the fund manager in making investment decisions, he cannot buy/sell according to his wish. Passive Investing includes investing in Index Funds which make an investment decision as per the Index. The fund manager can only Buy/Sell Stocks only when the Index Adds or Remove a particular stock.
Active Investment means where the fund manager invests according to his wish, where he thinks he will get the best returns for the investors. The fund manager is free to buy and sell stocks as per his wish and there is no restriction is buying stocks he can buy as many stocks of a company as he wishes to buy.
If you are able to find a Mutual Fund which beats the market returns you should invest in Actively Managed Funds otherwise you Should opt for Passive Investing.