How to Choose a Mutual Fund for Investment in India

Investing correctly could be rewarding in mutual funds. It may seem daunting to choose one out of over 2500 mutual funds in India. However, this can be made much easier if you understand certain key selection criteria. What are those? This article will explore the necessary parameters for selecting top-performing mutual funds thereby enabling you to make informed decisions when investing.

We will not only learn how to select a Mutual Fund theoretically but in the end we will analyze a real-life Fund Practical as well.

 

Understanding Mutual Funds

They pool money from several investors and invest it in different financial instruments under their management by professional fund managers to generate returns for them. Market conditions together with other factors such as asset allocation still determine how well or badly a particular mutual fund performs. 

Now the question arises if there are more than 2500 Mutual funds Schemes, how to select the right one? Below are some important criteria mentioned which you must check before investing in any Fund

 

 

Key Selection Criteria for Mutual Funds

While selecting a mutual fund, various parameters must be taken into account since they can affect the performance of your investment. Here are some of these factors:

1. Rolling Returns

Rolling returns is one among many indicators used while choosing a suitable mutual fund since it reflects on the consistency over time rather than CAGR (Compound Annual Growth Rate). The number of times positive returns have been provided by the scheme vis-à-vis its benchmark needs to be considered too; therefore, it should always indicate stability through consistent rolling results.

2. Fund Age

The age factor also plays a big role in determining whether or not you should go for any given type of mutual fund; thus, Parag Parikh Flexi Cap Fund is no exception. Generally speaking, older funds tend to possess longer history records which provide more reliable evidence about their past performances hence making them appear safer compared with new ones that might have only existed during favorable market environment periods.

3. Diversification

Diversify! Diversify!! Diversify!!! That’s what they say when talking about investments but why? It’s simple – by doing so you minimise risk exposure levels across different sectors and classes of assets where your money has been allocated towards investment purposes. Ensure that this applies when selecting a mutual fund by checking whether it has spread its investments equally into various asset classes such as debt, and equity among others.

4. Fund House Track Record

The reputation and track record of fund houses or AMCs (Asset Management Companies) should never be overlooked in the process of choosing what kind of mutual fund to invest your hard-earned money into. You should reflect back on how well they have performed historically; not only one but as many funds managed by them so far.

5. Expense Ratio

Another factor that people rarely take seriously until later on when everything else seems alright except this part – expense ratio! How much does it cost me? The lower this ratio figure appears the better for an investor like myself because more portion goes towards my pockets rather than being eaten up by expenses thus translating into higher returns eventually. For instance, if two similar funds have different ratios say 1% versus 2%, then go for the former since all other things remain constant it will give back more money on a long-term basis.

 6. Portfolio Turnover Ratio

 High costs mean less returns right from scratch, especially about the portfolio turnover ratio whereby frequent buying/selling activities within a given period may increase taxes thereby reducing overall profitability realized out of such transactions even though higher risks associated thereof too could lead to significant losses. However, this does not imply that low levels of turnover are always good either since they can also indicate a lack of active management hence compromising desired objectives attainment accordingly.

 

Detailed Video

 

Analyzing a Specific Fund: Parag Parikh Flexi Cap Fund

Let us take an example using the Parag Parikh Flexi Cap Fund because it helps illustrate these criteria clearly due to its strong performance coupled with adherence to the discussed parameters.

 Parag Parikh Flexi Cap Fund has a more stable investment approach compared to other funds in the same category.

Now, the theory part is over, let's apply all these learnings in real life fund to check if these mentioned criterions above are meeting or not.

 

We wil analyse Parag Parikh Flexi Cap Fund-

 

Criteria No.1 - Rolling Return 

Analysis of Table

1- You can see clearly Parag Parikh Flexi Cap Fund has beat Nifty 500 every single time whereas HDFC has been able to beat 85% only. 

2- PPFCP has never given a negative return whereas HDFC Bank Flexi cap fund has given a negative return.

3- Most of the time PPFCF has been generating returns of more than 10% for almost 65% and more than 20% return for 32% almost, that indicates how consistently the fund is performing.

 

Criteria No.2 - Fund Age

If you look at the fund age, its inception date is 24th May,2013 which means, its age is more than 10 years that is pretty good. You can find this information on Moneycontrol or  Parag Parikh's official website. 

 

Criteria No. 3 - Diversification 

As we have already learned about diversification, let's check if this fund has a diversified portfolio or not?

 

Let's have a look at portfolio composition- 

 

 

Conclusion 

We can see this fund has invested 84% in Equity, nearly 4% in Debt, and 11% in other assets.

This is not over yet.

In Equity allocation - they have not only invested in Indian equities, almost 14% of investment has been done in foreign stocks as well. Let's have a look.

Criteria no. 4 - AMC Track record -

Not only Parag Parikh Flexi Cap Fund has performed well, but you can also check by one on the below lists. These funds are also doing well in their category.

 

Criteria No.5 - Expense Ratio

The expense ratio should be as little as possible. Its expense ratio is 1.32% which is far lesser than category average that is 1.92%

 

Criteria No.6 - Portfolio Turnover Ratio

Again this fund has done excellent job by having better portfolio turnover ratio than category . 

 

 

 

Final Summary

Selecting the right mutual fund requires careful consideration of various parameters. By focusing on rolling returns, fund age, diversification, fund house track record, expense ratio, and portfolio turnover ratio, investors can significantly enhance their chances of achieving desirable returns.

The Parag Parikh Flexi Cap Fund serves as an excellent example of how these criteria come together to create a robust investment option. As you navigate the vast landscape of mutual funds, keep these principles in mind to guide your investment decisions. Remember, investing is not just about choosing a fund; it’s about building a strategy that aligns with your financial goals.

Disclaimer: This Stock Analysis is only for informational purposes and should not be considered as investment advice. Always do your research and consult with a financial advisor.