Introduction
Depending solely on past returns to pick the “best” mutual funds can be counterproductive since historical performance doesn’t ensure future success. The myth of a one-size-fits-all fund persists, highlighting the necessity for extensive research beyond short-term returns while investing in mutual funds. This blog helps you select the right funds for your portfolio. Let’s get started.
5 Best Ways to Find The Right Mutual Funds
Before selecting a mutual fund, it’s essential to carefully consider the investment category, which includes options like debt funds, equity funds, liquid funds, small or mid-cap funds, and hybrid funds. The choice should be based on your investment timeframe and risk tolerance.
Mutual Funds As Per Investment Horizon and Risk Factor
| Investment Horizon | Mutual Fund Category | Risk Factor |
|---|---|---|
| About 3 Month | Liquid Funds | Low-Risk |
| 1 to 3 years | Debt Funds | Low-Risk |
| 3 to 5 Years | Hybrid Funds | Normal Risk |
| 8 to 10 Years | Small Cap Funds | High Risk |
| 10 Years | Mid Cap Funds | Very High Risk |
| 5 to 7 Years | Large Cap Funds | Low Risk |
Having acquainted yourself with diverse mutual fund types and their investment horizons, let’s explore key guidelines to assist you in selecting the ideal mutual fund for your needs.
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Define Investment Goals
When investing in mutual funds, define your goal first– short-term (e.g., purchases) or long-term (e.g., retirement). This guides your fund selection – debt for stability, equity for growth, or hybrid for a mix. Then go on to understand your purpose, it can be capital appreciation, tax-saving, or specific needs.
Without a clear goal, small fluctuations might prompt premature exits. Align your investment horizon and return expectations with your goal.
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Assess Your Risk Tolerance
Analyzing risk is crucial; ensure it aligns with your comfort level. Equity funds offer higher returns but come with market fluctuations, suitable for long-term aggressive investors. Debt funds are more stable with potentially lower returns, which is ideal for conservative investors.
Consider your time horizon and risk profile using the above table to select an appropriate mutual fund.
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Check Funds Return Consistency
Assess the fund’s historical performance to gauge its consistency and reliability. Look for a fund with a steady track record, minimizing the impact of market volatility.
Understand the fund’s tax efficiency to optimize returns. Additionally, be aware of exit loads, as they can affect your profits when redeeming investments.
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Know Fund Manger’s History
Assess the fund manager’s performance and tenure, not just with the current fund but also with other funds they manage or have managed in the past. Look into their experience and track record to gauge their expertise in navigating market conditions.
It’s essential to know the person steering your investment, as their expertise significantly influences the fund’s overall performance.
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Credibility of the AMCs
When selecting a mutual fund scheme, assessing the Asset Management Company’s (AMC) track record is crucial. Decisions, especially stock selections made at the AMC level by the Chief Investment Officer (CIO), impact multiple schemes.
Poorly chosen stocks may be present across various AMC-managed schemes, emphasizing the importance of evaluating the AMC’s overall performance and decision-making history for informed investment decisions.
An example of mutual fund AMCs is SBI Mutual Fund, under SBI Asset Management Company, managing various funds, including SBI Bluechip Fund and SBI Small Cap Fund.
Conclusion
In conclusion, prioritising thorough research over relying solely on historical returns is essential in pursuing optimal mutual fund selection, dispelling the myth of an all-rounder fund. Investors should consider diverse factors for informed decision-making, avoiding potential pitfalls associated with chasing past performance.
To invest in mutual funds, consider Dhan, India’s one of the leading investment platforms. Dhan offers a mutual fund screener to help you find the best fund.