It has become challenging for an investor to choose the right mutual fund that can meet his financial goal. Given the plethora of funds available online, it is necessary to check essential parameters before zeroing in on the right mutual funds to achieve financial success as well as high returns. As many investors find it difficult to choose the right mutual fund, we have laid important factors to make it easy for you to select the right mutual fund.
1. Evaluate the skills of fund manager
Check the past performance of the fund manager considering the benchmarks and returns achieved in the past 3 or 5 years. Do assess how the fund has performed over the past years as compared to other funds of the same category. It is always better to evaluate the fund house as large mutual fund companies such as SBI, HDFC, Franklin Templeton have a good track record of delivering consistent returns to the investors and manage investments better than other companies.
2. Understand the philosophy of the fund
Every mutual fund has its own fundamentals and guiding principles that shape your investment style. It is better to understand the fund’s investment philosophy that can help you gauge the performance in different market cycles.
3. Charges and Fees
The expense ratio of the mutual fund is a critical factor to look for. The expense ratio includes advisor fees, legal expenses, accounting, record-keeping, etc. that are required to upkeep the fund. Some mutual funds have a lower expense ratio, but this does not imply that the fund will give higher returns or vice-versa.
There are numerous agencies that rank mutual funds such as Moneycontrol, Value Research, etc. by comparing the returns from mutual funds over the years. These agencies rank these funds from 1-5 given the returns delivered in the past. Do conduct a rigorous research on your risk appetite, investment horizon, etc. and not follow these agencies blindly.
5. Risk Parameters
- Standard Deviation: This will help you to understand the volatility of returns from a mutual scheme over time
- Sharpe Ratio: Determines the risk-adjusted return given by the fund
- Alpha Ratio: Compares the additional return given by the mutual fund as compared to its peers
- Beta: Gauges the fund’s volatility compared to the benchmark index
The primary aim of any investor to invest in mutual funds is to earn double-digit returns or at least more than traditional saving schemes. While comparing the returns you need to check the compare mutual funds with the same benchmark index. You should compare funds that have similar investing style, growth strategy, and etc.
Keeping the above-mentioned factors in mind, sound knowledge and through research are necessary to choose the right mutual fund scheme and grow hard-earned monies over time.