Mutual funds are pooled investment vehicles wherein an asset management company raises capital from different investors, who could be individuals or organisations. Mutual funds offer returns that are relatively better than those offered by traditional investment avenues like bank deposits, and thus have grown to be a popular option for many.
According to statistics released by the Association of Mutual Funds in India (AMFI), the mutual fund industry has seen a 5-fold increase from June 2011 to June 2021, while adding more than 80 lakh investor accounts in 2020-21.
As experts predict a healthy growth in folios in the industry, it is only common for you to decide to invest in mutual funds too. But the main question is – how to choose the best mutual fund to invest in?
How to choose the best mutual fund?
As per an April 2021 report by Livemint, a financial daily, there are more than 40 fund houses or asset management companies (AMCs) offering thousands of schemes to cater to the varied objectives and risk profiles of different investors. It is no wonder that choosing the best mutual fund amongst these to meet your investment goals is a task.
5 steps to select the best mutual fund
1. Decide your goals
You must be clear about your purpose of investment. You may want to accumulate wealth for your retirement, or you may want to save for your child’s higher education. Define your financial goal and accordingly decide your investment strategy.
2. Decide your investment horizon
Your investment goals determine the period for an investment. If you are investing for your retirement, you have a relatively long period of around 20 to 30 years. However, if you want to buy your dream car, you may have a short or medium duration in your hand, like 3 to 5 years.
3. Decide your risk appetite
Risk bearing capacity means the capacity to bear losses. Generally, in the investment world, higher returns entail higher risks. Investments in small-cap, mid-cap, or sector-specific funds tend to be riskier than investments in large-cap, balanced, or debt funds.
4. Keep an eye on the past performance
Higher returns in the past are never a guarantee of the same in the future. However, an analysis of the past performance of a company or a stock gives you a fair idea about the investing acumen and expertise of the fund manager to whom you are going to entrust your money.
5. Consider the fund’s expense ratio
The expense ratio means the amount of money that the fund house spends in managing its mutual fund scheme. A higher ratio means higher expenses, which in turn means fewer returns for you as an investor.
When contemplating options to park your savings and make them grow, another helpful tip is to seek professional investment advice. A financial advisor will not only be able to guide you on your investment journey with expert advice but will also suggest mutual fund investment options that would be unique to your financial needs and risk appetite.
