How to select best mutual fund?

How to select best mutual fund is a common query among new investors. All want to simply invest in the best MF with no or little risks. These days, investors favor mutual funds because of their diverse portfolios and appealing returns.

As an investor, one must keep in mind that not every scheme or combination of schemes is appropriate for every investor. An investor can choose a mutual fund plan that best fits their investing goals, risk appetite, time horizon, etc. 

There is no best mutual fund. This might be attributed to the fact that a mutual fund that is currently performing well is not necessarily guaranteed to do so in the future or to yield high returns. 

In a similar vein, the mutual fund with the worst performance today could end up with the highest performance tomorrow. Chasing the myth of the best mutual funds has resulted in significant losses for numerous individual investors. They also lost out on the opportunity to achieve their investment and financial goals while pursuing this fantasy.

 

Selecting Mutual Funds: Common Mistakes

Retail investors typically examine the performance of all funds over the previous one to three years and place their money in the fund that has produced the highest returns during this time. However, this is not a wise approach to mutual fund investing.

The process of selecting a mutual fund consists of two steps: choosing the mutual fund category and then choosing a mutual fund scheme. When choosing a mutual fund plan, an investor needs to know first about selecting mutual fund category and selecting mutual fund theme. 

How to select mutual fund category?

Below are some parameters to examine to select mutual fund category:

 

1. Investment Objective

An investor's financial goal that they want to achieve through their mutual fund investment is referred to as their investment objective. Any short or long-term financial goal of the investor, such as purchasing a home or vehicle, paying for their children's college education, taking a vacation, retiring, etc, might be the investment target.

 

2. Time Horizon

The term ‘time horizon’ describes how long an investor wants to hold onto their investment in a mutual fund scheme. It might last anywhere from one day to more than five years. For varying time horizons, different fund categories perform well. 

 

 

3. Risk Tolerance

Risk tolerance is the measure of how much risk an investor is willing to take on with their invested capital. All mutual fund houses display a riskometer, which illustrates five distinct risk categories connected with the principal amount invested. The five risk categories are low, moderately low, moderate, moderately high, and high. The table below lists the fund categories that are most appropriate for different risk profiles and time horizons.

 

How to select mutual fund theme?

1. Performance Against Benchmark

A mutual fund scheme's benchmark index serves as a baseline for evaluating the scheme's stock allocation and performance. The scheme's investment philosophies are guided by the benchmark index.

For example, a large-size mutual fund's benchmark should be an index of large-cap equities, while a mutual fund that focuses on banking stocks should have a banking index as its benchmark.

 

2. Performance Against Category

The success of a mutual fund scheme with its active peer group is another equally essential issue to consider. This aids in gaining a comprehensive grasp of the performance of the fund. This analogy means only mutual fund plans of the same kind should be compared. A large-cap equity mutual fund, for example, cannot be compared to debt funds or mid-cap funds; it can only be compared to other large-cap mutual funds.

3. Performance Consistency

An excellent mutual fund can provide steady, long-term returns for its investors rather than merely quick gains.

As an illustration, a specific fund's first-year return is 10%. In the following year, it is 8.5%, and 9.5% in the third year. In contrast, another fund saw returns of 2% in the second year after a first-year return of 11%. In the following year, it gave a 6.1% return then the first one was a more suitable fund because it gave consistent results.

 

4. Fund Manager's Background

The success of a mutual fund's fund manager is a crucial consideration when choosing one. The worst-performing mutual fund can become the best-performing fund with the help of an excellent fund manager. As the primary person for choosing which stocks or securities to invest in and how to allocate the funds for a certain mutual fund, the fund manager has a significant impact on the performance of your mutual fund. If the fund manager is competent, the specific fund will see success. On the other hand, the fund's future performance may suffer if the management is ineffective.

 

5) AMC Performance History 

A fund house, sometimes referred to as an Asset Management Company, is a business that oversees the scheme plans. 

Conclusion

The best mutual fund selection requires scrutiny selection of the financial goals, the time horizon, and risk tolerance. In other words, never go with the performances but opt for the one that draws consistency and aligns with your objective. First, be better equipped with the category, theme, and experience of the fund manager. There is no cookie-cutter type or one-size-fits-all mutual fund size. Ultimately, the mutual best will be what suits your needs best.

Hope this blog helped you with your common query about how to select a good mutual fund. Various factors are essential to be considered as mentioned above before choosing a good mutual fund. Disclaimer

We do NOT encourage/advise/suggest/recommend anyone to be involved or invest in mutual funds. This information should NOT be taken as recommendation/investment advice/offers/solicitations for the buy or sale of any scheme. Investors should do research, consult with their financial advisors, and consider their risk tolerance, financial ambitions, and investment goals before financial investments.