scorecardresearchBefore you invest in the next mutual fund, check out these factors

Before you invest in the next mutual fund, check out these factors

Updated: 26 Jul 2022, 11:45 AM IST
TL;DR.

Choosing a mutual fund scheme is not a cakewalk. It involves a lot of decision-making and consideration of factors that help decide which fund would yield you best, in the long run, depending on your investment horizon and financial goals. 

Myriad factors affect mutual fund investing decisions.

Myriad factors affect mutual fund investing decisions.

The markets are on a roll with both the stock exchanges riding high on investors’ expectations and foreign investors rushing to make the most of the falling value of the Indian rupee. Post a prolonged period of lull that dampened many investors’ spirits as continued volatility in stock prices reversed fortunes, people are gradually easing their way toward mutual funds. This is evident from the statistics that underscored continued inflows into various equity mutual fund schemes in June this year. Large-cap, mid-cap and Flexi-cap funds attracted more investments compared to other mutual funds with differing capitalization.

Besides, many asset management companies are coming out with new fund offers (NFOs) post restrictions by the Securities and Exchange Board of India (SEBI) that prohibited any new fund release.

The surprising fact is that despite continued pessimism in the market, retail investors continued their systematic investments in various mutual fund categories. This was followed by slight growth in the number of folios, thus, indicating more people investing in mutual funds or more money getting diverted into various kinds of mutual funds depending on financial goals and risk appetite.

While putting money in equities is a must, especially, for those with a long-term investment horizon, not every mutual fund may be worth your consideration and money. Keeping in mind the following tips will help you decide which mutual fund is the best fit for your investment portfolio.

Know your expectations

Are you aware of the returns you are looking for or did you invest in a mutual fund because someone advised you to do so? Are you someone willing to take risks with your investments or do you prefer a risk-averse plan that promises you fixed returns over the period? Unless you have answered these questions yourself, there is no point in choosing a mutual fund scheme that would help you achieve your financial goals. 

For example, if you have a wide investment horizon spanning over a decade, it would make sense to park your money in a mutual fund. However, a lot also depends on your risk appetite. Most fund investors prefer large-cap funds over others owing to the relatively high stability synonymous with the top 50 large-cap companies that these fund houses invest in. Those with higher risk-taking ability opt for value funds that take a contrarian approach to investing. Putting money in small cap funds means that the fund house bets on companies that have a small capital to start with but have the potential to grow big in the future. Small-cap funds can be tumultuous, thus, causing only the brave-hearted to opt for it.

Diversification

How many times have we heard and adhered to the adage, “Do not put all your eggs in one basket” Insisting on putting all your earnings in one or two mutual fund schemes can put you at the risk of sudden downturns in the short run. Apart, myriad factors affect market movements, which means that unforeseen macroeconomic factors can wipe out your wealth in stocks and funds. This explains why so many personal finance analysts stress on diversification of mutual fund investments in various asset management companies.

Diversification also translates to lower portfolio risks. However, you must not spread so thin that it erodes your portfolio returns. Diversify your portfolio as per your risk appetite and without compromising on the potential returns from the investments to be made.

Check fund history

Investing in a new fund offer (NFO) does not make sense, especially, when you are not sure of how the fund would behave in the future. This leaves you with existing mutual fund schemes that you must check out before deciding to include any of them in your portfolio. Check out the mutual fund performance, their management performance, expense ratio, portfolio turnover and other important factors. If possible, read management interviews to know their views and outlook regarding the stocks their funds are investing in. Though a fund’s past performance does not guarantee returns in future, it is still a good measure to understand how a firm withstands market pressures without succumbing to herd behaviour.

Mode of investment matters

The recent fall in the markets prompted many people to invest in lump sums as they used the cash they had set aside to invest. The common argument was to avail more units at lower net asset values (NAVs) which would then help them to gain more when the markets would go up. Still, others invested through systematic investment plans (SIPs), thus, allowing them to invest regularly without fail. While the first mode had its benefits, we cannot deny the benefit of investing in small sums regularly for a decade or more. If your idea is to invest a huge corpus that would get invested and reinvested in the market, sticking to SIP investments would do better than waiting for the market to bottom out before investing in a lump sum. Apart, time spent in the market is more important than timing the market.

There are many ways to decide and build on your mutual fund portfolio. However, irrespective of how you choose your mutual funds, you must not forget to review your mutual fund performance. This will help you decide if you must rebalance it every now and then. A small tweak in your portfolio can work wonders, which is why you must rejig your investments more often.

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First Published: 26 Jul 2022, 11:45 AM IST