Apart from wealth accumulation, there are various benefits of mutual funds that should be taken into consideration before finalizing a mutual fund plan. But first, let’s understand what a mutual fund is. Mutual funds are professionally managed funds that pool investments from several investors to invest in various securities such as debt, equity, and money-market instruments. Such funds are managed by a fund manager to earn the highest possible returns on them.
Now, mutual fund investments are a preferred choice among investors owing to their attractive and significant returns and diversified portfolio. However, as an investor,you must remember that no single scheme or set of mutual fund schemes is suitable for everyone. A suitable mutual fund scheme is the one that suits your financial objectives and goals, and risk appetite, and investment horizon among other factors.
Parameters to pick the best mutual fund (suiting your needs)
Let’s understand some criteria and parameters to choose an ideal mutual fund scheme for you:
- Investment objectives or goals
Before deciding to invest in mutual funds, you need to evaluate your financial goals, be it short-term or long-term, your risk profile, and the duration for which you wish to stay invested. An investment objective aids in deciding the macro-level assortment of mutual fund schemes. Your investment duration can have an instrumental impact on your investment decisions.
- Performance against benchmark
A benchmark index of a particular mutual fund scheme is a standard against which its stock allocation and performance are compared. It guides the investment philosophy of the fund. Thus, the asset allocation of a benchmark index ought to match with the investment objective of the scheme.
- Consistent returns
A good mutual fund scheme is the one that generates consistent,desirable returns over a period and not just whirlwind gains. A good mutual fund should be able to provide consistent returns in both bearish and bullish markets.
- Expense ratio
The expense ratio is an essential factor to consider as they have the potential to take away a substantial chunk of your earnings. A reasonableexpense ratio is anywhere between 0.5-1.5%. Anything above 1.5% is usually considered as a high expense ratio. As a thumb rule, higher the Asset Under Management (AUM), lower will be the expense ratio.
- Fund manager’s experience
The fund manager plays a significant role in the performance of the scheme. Although, it’s a process-oriented approach, the fund manager has an ultimate say. Hence, his/her experience and view counts should be accounted as well.
Each investor is unique in terms of his/her investment decisions. Mutual fund investments do not adhere to the concept of ‘one shoe fits all’. The best mutual fund scheme does not mean the one providing the best returns of the lot, but the one best suited for your needs. Neither should you choose a mutual fund scheme solely based on their past performance. Happy investing!