Investing can turn out to be a nightmare for those who end up investing in a wrong funds and lose out on their savings.
There are numerous funds available in the market bearing fancy names to attract the investors. There are 380-odd equity schemes on hand having names like thematic fund, special situation fund, hi-fi fund and even unique opportunity fund.
This leads to more confusion as to which fund one should opt for. So what are the pointers to be kept in mind while choosing a right fund?
Past performance does not guarantee future returns
One should not blindly invest in a fund by looking at its past performance as many funds may perform well in a certain period because of their portfolio allocation, but as the market conditions change the funds starts giving different results.
One can consider a fund which has been performing well consistently in both bullish and bearish market conditions, but don’t zero in on a fund depending on its short term performance.
Fund Strength
One can start by evaluating how big the fund is. The asset under management of a fund house determines its strength and how big it is. Make sure this is one of the criteria on the basis of which you can determine your mutual fund scheme. A fund neither too big nor too small will do the trick.
Currently small-sized funds are attracting a high cost structure and the small fund managers have difficulty in getting the market information by research houses. Big funds on the other hand hardly invest in small stocks and get profit from their performance, they are usually forced to invest in only large cap stocks.
If past performance is to be seen usually the average-sized funds fare better than small and big funds.
Risk appetite
Disclaimers associated with mutual funds clearly mention that investment in mutual fund is subject to ups and downs in the stock market.
Thus, there is a fair amount of risk involved while investing in mutual funds. So invest in a fund depending on what is your risk appetite, which depends on various factors.
If you are a young investor you can take more risk with your money and accordingly invest in equity oriented funds more, but as you grow older the number of years left of your job decrease, hence, bringing down your risk appetite.
Thus in older age invest more in funds that give guaranteed returns.
Conclusively if you invest for a longer term (over 5 years) you can take high risk while for a short-term investment (less than 5 years) the risk-appetite decreases. Hence, it’s advisable to always start young and begin by investing in equity-diversified schemes and as your portfolio grows, include small and midcap funds and later on debt funds.
Cost Involved
The fund manager usually charges some fees for investing your money in the right fund. A fund’s expense ratio states how much you pay a fund house in percentage terms to manage your money.
It comprises of fund management charge, agent commission and the selling and promotion expense.
According to Sebi guidelines an AMC can charge maximum 2.5 per cent for equity funds and 2.25 per cent for debt funds.
Infact the fund doesn’t shy away from charging the expense ratio even when the returns are negative.
Turnover ratio is the percentage of assets that are sold during a specified time. Make sure you chose a fund with a lower percentage turnover.
A good fund will always give good returns with minimal expenses.
Fund Allocation
It is very important to understand what your fund consists of. Apart from the basic knowledge of it being an equity fund or debt fund, you should be well aware as to where your fund manager would be investing your money.
In the fund prospectus, the fund house explains as to what sectors it invests in and the prime holdings of the fund.
Usually the fund doesn’t deviate very much from what is mentioned in the prospectus. For example, in a sector fund it invests in stocks pertaining to a specific sector while in a diversified fund it usually invests in large caps.
This makes it easy for you to understand if a fund is in line with your perspective and whether it will think and move according to your plans.
The writer is the CEO of bankbazaar.com