Investments in the equity and debt spaces has increased drastically, thanks to growing awareness of people on personal finance. This has picked up drastically after knowing that the markets have crashed and there is a lot of opportunity to multiply the wealth by simply investing.
To get started with the investment, one requires the correct investing instrument which would help reach one’s financial target but when it comes to selecting a mutual fund people generally would just look up that fund’s past performance and also highly consider the rating by various credit rating agencies to the particular fund before deciding it as the ideal fund to invest.
But is this the right approach to pick a fund just considering past performance? or is there more to it to filter out the best fund to invest. Try to read the full article to get the answer to your question.
Key Parameters to look for in a mutual fund
If you have already thought of a mutual fund to invest in, make sure that mutual fund satisfies and excels in all the below 8 parameters for you to decide if you can proceed to invest or find another fund which passes all the parameters.
Let’s discuss each one of them on detail for a better understanding.
1. Category
Investing is a personal affair so everyone has their own financial goals and the time window they can afford to reach their goals. Also, they have their own risk profile. Since mutual funds come in all shapes and sizes, every investor has a mutual fund to invest and based on investor’s risk appetite, financial goals, and the timelines they can pick the right category of funds.
for e.g.: If you are not a risk taker and need decent returns in a short or midterm, i.e., <= 3 years you should prefer debt and if you are a bit of risktaker and have high time horizon, your pick should be an equity fund. One should be clear in choosing the right category of fund.
To pick the right debt, equity, and Hybrid fund as per your time horizon, refer the below Charts.
2. Top performer in Returns
An ideal mutual fund’s past performance should be having a good returns ratio. The fund should always be in top 5 when you filter it across the category in terms of returns across various time frames like 6 months, 1 year, 3 years etc. A mutual fund with at least 1.5 to 3 years of performance time should be considered for investments. If there is a mutual fund that returns over 15% in it’s first year but had yielded 9% and 5% over a period of next 2 years, don’t be fooled by the 15% in the past and it’s always best to avoid such inconsistent funds.
3. Fund House
It’s important to know if the company managing the fund is a well reputed and are good with financials. Even if the fund is delivering good returns, it’s best to avoid the fund coming from a company with a bad reputation or about to bankrupt in the interest of one’s investment.
4. Standard deviation
Standard Deviation represents the volatility factor of the fund.
For example, for a fund with a high standard deviation the returns ratio would be extreme high or extreme low. For a fund with a lower standard deviation, funds will yield lower returns ratio if the market goes either up or down.
It’s always advisable to choose fund B in this case to avoid any mishap to the investment dur to the volatility.
5. Expense Ratio
Expense ratio comprises of all the expenses charges by the fund house in order to manage the fund. The lesser the expense ration the more it should be favored to be included in our portfolio. If the performance and returns of a fund are exceptional but the expense ratio is on the higher side, it can still be considered for investment.
6. AUM (Assets Under Management)
It’s the market value of the capital managed by that AMC for the fund. In simple terms, it’s the total money that all the investors have invested that will be managed as part of that mutual fund. Generally, a fund with a higher AUM is preferred over the one with lower AUM because a higher AUM means more people are invested into this making it somewhat trusted mutual fund. Also, higher AUM would generally be having lower expense ratio.
7. Alpha
Alpha of a fund is the performance parameter of that fund compared to the benchmark fund of that category. It’s basically how high the fund has been able to yield returns when compared to benchmark fund. for example, the fund with alpha of 2 is when a particular fund yielded 2% more that it’s benchmark fund and for a fund with alpha -2, the fund yielded 2% less returns compared to benchmark fund.
8. Beta
Beta is the volatility measuring parameter of a mutual fund when it is compared to the benchmark fund. for example, for a fund with beta > ‘1’, it signifies that this fund is going to be highly volatile compared to the benchmark funds and if beta <‘1’ then the fund would be significantly less volatile and steady. Ideally, the fund with lesser beta value if preferred over the one with a high value.
Conclusion
Selecting the right mutual fund is a tricky job especially when you have so many types of them available in the market. It becomes very important from an investor’s standpoint to pick the right fund to achieve their financial goals with the time frame they have.
Mutual fund investment is a long-term affair and it’s very important to start early to bring the snowball effect into the picture which would multiply your wealth over the years. So, start your investment today to make the most out of the fallen markets and make sure the mutual funds you are choosing to invest in are satisfying all the above parameters to have a successful mutual fund investment journey.
Choose Wisely!!
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