How to choose best mutual fund to invest?

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          The Mutual Fund (MF) Industry's asset under management (AUM) has grown more than 2 fold increase in a span of 5 years, from ₹ 11.86 Lakh Crore as on 30th April, 2015 to ₹ 23.93 Lakh Crore as on 30th April, 2020. Currently, less than 6% people are investing in mutual fund in India. As per growing number of accounts in MF industry, it is been excepted that more than 25% people will invest in mutual fund in coming years.

          In one of my post I have written about mutual fund, its different types, you should invest in it or not, how to invest in it and my personal view on mutual fund. Before reading this blog I would say gain some basic knowledge about Mutual fund from the previous post: Mutual funds are good or bad ?

➤ Factors for selecting mutual fund category (Equity MF, Debt MF or Hybrid MF):

Before selecting any mutual fund scheme you need to choose mutual fund category. 
  • Investment Objective: It refers to investors financial goal which he aims to accomplish with mutual fund investment. It can be buying house, retirement plan, child education, child marriage, etc.
  • Time horizon & Risk factor: Time horizon refers to time period for which investor wants to keep the invested amount in a mutual fund. Risk Tolerance is the amount of risk investor is willing to take with his investment amount. I have attached a chart showing different mutual fund according to risk profile, time horizon and expected return. 

 

➤ Factors to consider before choosing mutual fund scheme:

        After selecting mutual fund category, you need to choose correct mutual fund scheme where you are finally going to invest your hard earned money.  

1. Fund Performance: A good mutual fund is one which is generating consistently good return over a period of time. Investor should check fund performance in last 5 years to know the fund manager potential to provide consistent return as well as it gives you good judgement idea. Check how fund performed in bullish and bearish market. 

2. Fund Manager: The fund manager are the one who invest mutual fund money in different assets as per their expertise and experience. His role is to efficiently use MF money for generating good return. So fund manager experience plays vital role in selecting mutual fund scheme. Some of the top fund manager are 
  • Neelesh Surana (Mirae Asset Global Investment)
  • Shreyash Devalkar & Jignesh Gopani ( Axis Mutual Fund) 
  • Rajeev Thakkar (Parag Parik Mutual Fund)
3. Expense Ratio: An expense ratio refers to percentage of amount you pay to mutual fund house to manage your money. For example, if you invest Rs. 10000 in a fund with an expense ratio of 1.5% than you are paying Rs. 150 a year to fund house to manage your money. It includes management fees, administrative fee and distribution fee. In simple words, if a fund generates 15% return annually and has 2% expense ratio then you will make return equal to 13%. The Net Asset Value (NAV) of a fund is reported after deducting all fees and expenses. According to SEBI Mutual Fund Regulations, the maximum limit of expense ratio is 2.5%. So, lower the expense ratio, better the mutual fund return.   

4. Exit Load: It refers to a cost that an investor pays to mutual fund house if he wants to sell the MF units before a predefined time frame. Typically, equity mutual fund schemes levy an exit load of 1% if the units are sold within on year of buying. There is no exit load on liquid fund. For example, if the NAV is Rs 35 during the time of redemption and exit load is 2% than you will get amount with NAV of Rs. 34.30 (2% of 35=0.70 is deducted in NAV).


          Finally, I would say always consider above factor before investing in mutual fund. I personally don't like to invest in mutual fund as I want my own portfolio of company but that does not mean mutual fund investment is bad. I would recommend that one should invest in equity MF as well as debt MF to withstand market turbulence and safety purpose. Always invest in MF Direct Plan as expense ratio is low hence, return percentage is high as compared to Regular plan. One should invest in equity MF with atleast 7 years time horizon.  


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