How to Choose the Correct Mutual Fund for My Needs?

The asset base of equity mutual funds (MFs) surged 13 percent to Rs 3.45 lakh crore at the end of March 2016, compared to Rs 3.05 lakh crore in March 2015, says an article published in The Economic Times in April 2016. Mutual fund investment is considered to be an effective tool for building a significant corpus, whether for the purpose of wealth creation, retirement planning or savings. Being professionally managed, it is ideal for individuals who do not have the time and knowledge to assess the market day-in and day-out. When you invest in an MF, most of your investment decisions are taken by experienced portfolio managers.

Steps to Choosing the Right MF

There are various types of mutual funds in India, including equity, debt and hybrid. Each scheme invests in different types of security. They have a specific objective and carry different levels of risk. You should familiarize yourself with the different types and the risks each one carries before parking your money in any one of them. Here are a few steps to choosing the right money management tool:

 Identify Your Goal – You must identify the objective with which you are investing your money. You can consult a financial advisor, who will assess your expected rate of return, your current financial condition, and risk appetite and investment time horizon to determine the amount of money you must invest and the type of scheme you should opt for.

Choose a Scheme – While choosing a scheme, you need to assess its past performance for the short, medium and long term of 6 months, 3 years and 5 to 10 years, respectively. You must also calculate the risk-adjusted returns of the scheme, comparing the returns offered by the scheme with that offered by securities carrying zero risk, such as government treasury bills. Also, choose a scheme that has consistently surpassed benchmark indices. You can also refer to the ranking provided by various research portals.

Know the Fees – Annual charges and fees for mutual funds in India might include advisory fees, transaction costs and annual management charges. Make sure that you are not exorbitantly charged.

Assess the Fund Manager – Go through the fund manager’s qualification, his past performance and investment style. He should be consistent in his investment style and adhere to the objective of the scheme.

To know more about money management though mutual fund investment, you can consult your financial advisor.