Mutual Fund Investment: 5 criteria to pick the right mutual fund

The mutual fund portfolio should be carefully designed keeping in mind your financial objective, investment horizon, and risk appetite. Whether it is a short-term or long-term goal, there are several mutual funds to cater your investment needs. As selecting a mutual fund is a unilateral decision, you can refer to past performance of a mutual fund, however, your portfolio should completely focus on the financial goal.

Here’s a list of 5 criteria in picking a mutual fund:

Expense Ratio: All mutual funds incur an expense ratio to manage a particular mutual fund plan. This expense ration includes advertising cost, operating cost, administrative fee, audit fee as a percentage of fund’s net asset.

For instance, if a mutual fund is charging an expense ratio of 2%, that implies every year 2% of total scheme assets will be used to cover operating and miscellaneous expenses of the scheme. Generally, these expense ratio is managed within the limits prescribed by SEBI.

SEBI has defined certain guidelines keeping in mind Assets Under Management (AUM) for every mutual fund scheme. The total expense ratio (TER) should be under 2.5% for INR 100Cr of average weekly net assets; 2.25% for INR 330Cr and 1.75% for the balance AUM.

The net asset value of a mutual fund is directly affected by the total expense ratio. Therefore, lower the expense ration of a mutual fund, higher the NAV. The mutual fund having higher expense ratio is better than with a low expense ratio, given it has provided consistent returns in the past.

Also Read: Top funds that made it to the top 5 list

Taxation: Every investment in mutual fund is taxable depending upon the time horizon of the investment. Short-term capital gain is levied if the mutual fund is held for less than 12 months while long-term capital gain tax is applicable for more than 12 months. The short-term capital gain is levied at 15% while long-term tax is levied at 20% with indexation benefit.

Risk Vs. return: Equity-oriented mutual fund carries a huge amount of risk as compared to debt mutual fund. However, if you have a long term horizon then equity can give inflation adjusted double digit returns. The return in equity mutual fund are governed by macroeconomic factors while in debt fund, interest rate and credit risk govern the interest rates.

Ratio and performance analysis: Investing in a mutual fund requires rigorous research in finding the average returns, sharp and tenor ratios, and standard deviations. It measures the average return and exposure to risk. Alpha implies the less or extra income generated in comparison to the benchmark. You can monitor how often a positive alpha has been generated by the mutual fund mangers and keep a hawk eye on the performance of the mutual fund while choosing the ideal fund.

Fund Managers: The last, but not the least every fund manger has a major role to play to generate huge returns for its investors. Prior to investing in any mutual fund, you should be aware of past track record and stability in the firm. For instance, Franklin Templeton mutual fund has a good line of fund managers both for equity and debt mutual funds with a good track record of providing decent return to investors. You should also exit a fund, if the mutual fund is not delivering returns as per your investment goals.

To conclude, the choice of mutual fund should depend upon your risk appetite, investment goals and the duration of the holding.

 

 

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2 thoughts on “Mutual Fund Investment: 5 criteria to pick the right mutual fund

  1. Pingback: Should you invest in mutual funds when the stock market is volatile? - Shoprwise

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