More often than not, mutual fund investors tend to get bogged down by information overdose when they want to select one or two mutual funds to invest into. A normal scheme information document (SID) of any mutual fund usually runs into 60-80 pages which are riddled with charts, tables, statistics and not to mention some legalese.
Amid all this, a novice untrained investor is usually unable to separate the wheat from the chaff. Alternatively, investors base their decision on just one factor: returns. Wealth advisors, however, refrain from recommending this approach to investors.
Instead, they suggest that investors should first identify their financial goals and see if the particular fund scheme helps them achieve it or not.
So, the key factor to consider is ‘why you are investing and for what financial goal’.
“The most important data-point that investors look at while selecting mutual fund schemes is past return. However, this is a big mistake. You can look at historical data and pick out the funds which have delivered top returns. However, it could still be inappropriate for you to invest in them. Instead, investors should select mutual funds on the basis of financial goals. So, the most important filter is why you are investing and for what financial goal, other factors come after this,” says Ravi Saraogi, CFA, Co-founder of Samasthiti Advisors
Assess the risk too
There is a raft of other key factors to consider before you decide buy mutual fund units. These include the category of funds the scheme falls under such as flexi cap, mid cap or large cap, etc; price at which the units are available, risk they carry, credibility of the fund houses, future earning potential of constituent stocks and the financial goals.
Some investment advisors assert that the investors should first assess the risk involved in mutual funds and make attempt to minimise the same instead of indiscriminately chasing the returns.
“Some investors select a mutual fund based on star rating and feel they are sorted. But most are not aware of the nature of the funding which they are investing, and do not know its type, its investment philosophy, or its inherent risk. This kind of fund selection is very risky and lacks the ability to invest consistently in the long term,” says Preeti Zende, founder of Apna Dhan Financial Services.
Other factors to weigh
Investment advisors suggest that investors should invariably focus on their financial goals, nature of the goal, risk-appetite, track record of fund house and that of fund managers.
“It is vital to note that there can not be one-size-fits-all approach. For instance, if you are looking for stable and secure returns, then you should not choose a fund scheme that is inclined towards small caps regardless of how good the other factors may sound,” says Deepak Aggarwal, a Delhi-based chartered accountant and financial advisor.
While elaborating on the similar lines, Ms Zende says that investors should see whether the particular fund’s philosophy matches with that of investor and the goal required.
“The selection of mutual funds depends on many factors such as your financial goal, nature of the goal, risk-taking ability of the investor, mutual fund and AMC’s track record, whether the philosophy of this particular fund matches with the investor and the goal required, mutual fund manager’s skills and experience, expense ratio of the fund, performance of the fund in bull and bear market both at least for least 7 to 10 years and the downside protection it can offer in a bear market,” adds Zende.