How to pick the Right Mutual Fund for Investment

How to pick the Right Mutual Fund for Investment

Mutual funds are amongst the most popular investment options as they can provide a solution to various investment needs of the investors. An investor can look outfor mutual funds for different reasons likecreating wealth, retirement planning, children’s education, purchasing a home, or even for a vacation abroad.

Many times we hear people around us say that I do want to invest in a mutual fund, but I am not sure how to choose one?

So, here are a few points to be kept in mind while choosing a mutual fund.

Things to know before Selecting a Mutual Funds

a.   Purpose of Investment

You will be able to make a better judgment if you are investing with a specific objective in mind. As stated above, the purpose of investment in a mutual fund could be anything. With a certain objective in mind, you can make an informed decision.

b.   Tenure of Investment

The period in hand to meet your investment objective helps in deciding your risk appetite. Generally, an investor can take more risks if he is investing for long-term goals. If you are investing for a small tenure, prefer to buy a mutual fund having a lesser risk probability.

c.   Know your Risk Appetite

All investments are subject to risk. There is a certain risk associated with each type of investment. Your risk appetite will determine how much risk you can take while making investments. There are several factors like your age, investment goal, current & expected future income, investment horizon, etc. which are considered to determine the risk appetite of an investor.

There are several tools available online using which investors can calculate their risk appetite and make a more informed decision to invest in a mutual fund.

How to Choose Right Mutual Fund?

Keeping the above pointers in consideration, the following are the factors you should contemplate to select a correct mutual fund-

Risk profile: Before investing in a mutual fund, study the risk profile of the scheme to ensure that you are taking the right amount of risk, keeping your risk appetite into consideration. Debt funds are appropriate for investors with low to moderate risk appetites while equity funds are more appropriate for investors having moderately-high to high-risk appetites.

Time Horizon: Another key aspect of selecting a mutual fund is to know how much time do you have in hand to achieve your financial goals. If you are planning an investment for the short to medium term, debt funds are more suitable, while if you are planning an investment for a long-term goal, equity-based funds are more appropriate.

Expense Ratio: Expense Ratio is the maintenance fee payable in form of a percentage of assets to the fund manager (i.e. AMC) to allocate, manage and advertise the fund to maximize the returns and manage risks. A higher expense ratio means lower profitability, while a lower expense ratio implies higher profitability for the investor.

Exit Load: Apart from administration and operation charges charged by mutual fund houses, some also charge exit load if an investor exits from the scheme either partially or fully within a particular time from the date of entry. Being aware of exit load is essential for the investor while choosing a fund.

Record of Fund Manager & Fund House: Before investing in a mutual fund, the past performance of the fund should be analyzed and compared with its peers. Also, the historical performance of the fund house and fund manager is very important to ensure you will achieve your financial goals by investing in a particular mutual fund.

Taxation: Taxation is another key factor that you should keep in mind while investing in a fund. Any capital gain earned by an investor by investing in a mutual fund is subject to capital gain tax, which can vary from 10 to 15% of the capital gain made by the investor, depending upon the tenure of investment.

Also, in case you opt for an Equity Linked Saving Scheme (ELSS) fund for investment, they can claim a deduction under section 80C of the Income Tax Act. This can be another criterion for selecting a fund.

Lump-Sum or SIP: Once a mutual fund has been selected for investment, you should also decide whether to invest in a lump sum or opt for a Systematic Investment Plan (popularly known as “SIP”).  However, with advantages like averaging costs and the power of compounding, SIP is considered a better way of investing in a mutual fund.

Bottom Line

At present, there are many mutual fund options available in the market for you to select. If you evaluate these mutual funds based on the factors discussed above, you will know the most suitable mutual fund for you. The best mutual fund will make you achieve your financial goals within the desired timeframe & by keeping your risk appetite into consideration.

If required, you shouldconsult a financial advisor for further assistance in identifying the best investment options for you.

3 thoughts on “How to pick the Right Mutual Fund for Investment

    • Author gravatar

      After reading this article I feel a bit confident to start investing in mutual funds 😃
      Thanks for the informative article
      Hope it helps many people like me who have zero knowledge of mutual funds to pick out the best for them and start investing👍

    • Author gravatar

      Wow.. wonderfully explained. I am looking to start investing in mutual funds and this article is perfect especially for beginners.

    • Author gravatar

      Great writings here are always and I really like everything here.

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