With over 44AMC’s and more than 2500 schemes, choosing a mutual fund is not easy task. Choosing mutual fund is like a finding a life partner that could either boost or wipe out your wealth. So, The Question remains How to select Mutual Funds? This is the most common yet most complex question to answer. One’s decision should not be only based on Mutual fund rankings as these ranking by various agencies are biased and these are based on single factor i.e. past performances. It is not a magical wand that could guarantee returns. The decision to select Mutual fund scheme is not an easy task but one should have the basic idea.
Time Horizon and Risk Appetite
What is reason for your investment? Investor should have investment goal in the mind whether a person is selecting a scheme for higher education of children, medical treatment, foreign trip, retirement planning. The two things should be kept in mind before investing is time horizon for investment and risk-taking capacity of individual. Many of us think that Debt funds are risk free but considering the current COVID crisis Debt funds can even deliver no return or either wind up like Franklin Templeton. At this step we can make a decision whether one need to invest for short term or long term depending on their risk appetite.
The market may be volatile in Short run but can give provide high earning over a longer time. The table below is guide to a fund type by taking time horizon and Risk tolerance into consideration.
| Time Horizon/Risk | Low Risk | Medium Risk | High Risk |
| Short Duration (up to 2 years) | Liquid Funds, Ultra Short-duration Funds | Short-duration Funds | Arbitrage Funds |
| Medium Duration (2 years – 3 years) | Short-duration Funds | Balanced Advantage Funds | Equity Hybrid Funds |
| Long Duration (3 years and above) | Large Cap Funds | Multicap Funds | Mid Cap Funds, Small Cap Funds |
Assets Under Management (AUM) and Asset management companies (AMC’s) reputation
AUM sometimes called as Funds under management (FUM) measures the total market value of all financial assets. In simple words it means how many subscriptions the scheme has received. The bigger the size the bigger is confidence of investor. Also, AMC’s deploy their best fund managers for the Mutual fund with high FUM. So, on this basis one can eliminate the Funds with below average AUM.
AMC invest pooled funds from Clients. It is a company which manages a mutual fund. One can look at number of qualitative factors like age of fund house, the overall AUM, No. of schemes run by AMC and AMC’s reputation. A trusted AMC will help you to park your investments smartly and wisely.
Expense Ratio and Exit Load
Expense ratio is the fee charged by the AMC for the management, operations, promotions and distribution of fund. The figure of expense ratio varies from 0.6% to 2.25%. While selecting a fund one should look at expense ratio as it affects the overall return of Scheme. The expense ratio up to 1.6% is considered good.
Another thing to consider is exit load, Investor can be charged up with some fee called Exit Load if investor tries to liquidate its investment before a certain maturity period. If investment is made with giving due consideration to exit load it can eat up all your return as it can be as high as 3%. The scheme should have minimal exit load.
One should also assess the mutual fund scheme on the basis of Performance across category and consistency. Historically, good funds have always given attractive past performance. However mutual fund in its risk factors will state that past performance is not a guarantee of future performance. The fund should be capable of providing a consistent return. Further Mutual Fund performances should be compared with its peers. The comparison should be same category. For example, mid cap should be compared with other mid cap funds not against small cap or large cap funds. Lastly, Mutual Fund rankings can also be considered. CRISIL, Value Research, Morning Star, ICRA are various rating agencies. They evaluate mutual fund schemes on various factors. On this parameter one can drop mutual fund schemes with below average ratings.
Lastly, one should not “Invest and forget”. The fund should be constantly monitored and rebalancing in portfolio should be done based on economic conditions.
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