How to Choose the Best Mutual Fund Investment in India

akshata roy
Jul 24, 2017 · 6 min read

Ten years ago if you had started investing Rs 1,000 every month in mutual funds, you would have seen your investment which would be around Rs 1, 20,000 growing over 6–7 times by now. Top mutual funds gave around 30% annualised return over the past 10 years. There are close to 60 such equity schemes that have given over 20% annualised return in the last 10 years.

Stock markets from their very birth have been unpredictable. If someone doesn’t possess the desired knowledge and experience into dealing with stocks, he/she could suffer financial damages. Here is where mutual funds comes into play.

Mutual funds are arguably the best investment options available for investors in terms of ease of investments and different risk/return paradigms available. Depending upon your risk profile and longevity of holding period, you can chose between various debt, equity and balanced funds. You can invest capital in mutual funds to save tax or get tax concessions and also to grow wealth.

For someone who is warming up to the investment game, choosing the best Mutual Fund Investment in India can be a tricky proposition. Following are the steps an investor needs to follow for choosing the best Mutual Fund Investment in India:

1. Define your Financial Goal:

Do you want larger retirement fund, meet children’s education or marriage expenses, money to buy a house, or fund a vacation?

Once you zero down on your goals, you have fair idea on amount and timeline of your financial needs. With financial websites having inbuilt calculator, choose the best fit for your goals. However, make sure that inflationary aspect is not missed out.

2. Your appetite to digest Risk:

Age, goal and resources available define your appetite for risk. If you’re young and have just begun you career, opt for a larger share of equity funds in your portfolio. Investments in most securities come with a degree of risk and if returns are not in proportion to the risks taken, it is not worth going for such investments.

3. Pedigree of Fund House:

Before zeroing in on a scheme of your choice, you must select the fund houses on which you have enough faith to invest your money. Try to identify fund houses that have a strong presence in the financial world and provide funds that have a reasonably long and consistent track records. A fund that performed well in the past may or may not continue to provide good returns in the future.

4. Fund Rating

You have considered mutual funds rating given by CRISIL & Value Research. Mutual Funds that are rated by Crisil as Rank-1, Rank-2, Rank-3, and Rank 4 indicates consistent performance in all market cycles. Also, Value on Research (VRO) is worth considering.

5. Fund Holdings

Another parameter for the short listing of Best Mutual fund is fund holding. Most of the funds are holding blue chip stocks or making an investment in stocks which are likely to appreciate in future.

6. Expense Ratio

Expense ratio is one of the important factors that affect mutual funds return. Higher the expense ratio means a lower return. All the funds given below are with low expense ratio.

7. Fund Manger’s Expertise and Experience

A Fund manager is the person who makes the decision about buying, selling, or holding the stock in the mutual funds. The returns of the fund depend on the decision taken by the fund manager and its expertise.

8. AUM (Asset under Management):

Asset under Management measures the total market value of all the financial assets which a financial institution such as a mutual fund, venture capital firm, or brokerage house manages on behalf of its clients and themselves. Higher AUM means more and more investors are investing in such funds, thereby creating confidence about the fund.

9. Check your Consistency

Will you invest in an equity fund that gave over 100% returns at a time when the equity markets were witnessing a secular bull run but showed a sharp drop in net asset value (NAV) when the markets were volatile? A good mutual fund scheme is one that consistently manages to outperform its benchmark over 3–5 years.

10. Portfolio Diversification:

By its very nature, mutual funds are supposed to provide diversification across different asset classes, stocks, sectors and even geographies. A diversified portfolio has lower risk than a portfolio biased towards a particular stock, an asset class or a sector.

11. Time-Frame:

You should be absolutely clear about time horizon expected return and investment objective before making an investment. Always select SIP route for investment rather than doing lump sum investment. Invest in mutual funds for the long-term at least 3 years or above.

Following are the various categories of mutual funds available:

· Large Cap-oriented Equity funds

· Diversified Equity funds

· Small and Mid-cap Equity funds

· Thematic — Infrastructure funds

· Equity Linked Savings Scheme (ELSS)

· Index funds  Balanced funds

· Monthly Income Plan — Aggressive

· Long Term Gilt funds

· Income funds

· Short Term Income Funds

· Credit Opportunities Funds

· Ultra-Short-term Debt funds

· Liquid funds

Reasons to invest in Mutual Fund

· Experienced and rightly Qualified Experts

· Constant Customer Support

· Investment depending on client’s need and profile

· Mutual funds helps client understand changing economic conditions

· Most mutual fund don’t charge processing fees

· Highest return option compared to any other financial products

Few important ratios that can help you choose right fund:

· Beta-Volatility measure and tell how much the fund changes for a given change in the Index. Lower the beta, lower the volatility. Hence, your fund must have lower beta.

· Standard deviation-It tells us how for a given set of returns, how much do fund returns deviate from the average. Lower the standard deviation, lower the volatility. Hence, your fund must have lower beta.

· Alpha-It is the risk-adjusted measure. By taking risks, how much the fund manager generated the return over the benchmark. Higher the alpha, higher the outperformance of the fund.

· Sharpe Ratio-It is the risk-adjusted measure. Higher the Sharpe ratio, better is the performance.

· Sortino Ratio-It is the risk-adjusted measure. Higher the Sortino ratio, better is the performance.

· Treynor Ratio-It is also be known as reward ratio. Higher the Treynor ratio, better is the performance.

· Information Ratio-This is calculated by average excess return obtained compared to a benchmark and divides it by the standard deviation of excess returns. Higher the information ratio, higher the consistency in beating the benchmark.

· Omega Ratio- It is a risk-return performance measure of an investment asset.

· Downside deviation-This is also be called as BAD RISK.

· Upside potential-This is exactly the opposite of Downside deviation.

· R-squared- It is a measure of how correlated the fund’s NAV movement is with its index.

· SIP Returns-For how many times the fund’s returns are above the index when we invest in SIP.

· Lump Sum Returns-For how many times the fund’s returns are above the index when we invest in a lump sum.

Points to remember

· Carry out assessment and balance your mutual fund portfolio at regular interval.

· Consider STP (Systematic Transfer Plan) for switching from one mutual fund to other.

· You don’t need more than 3–4 funds for investing in mutual funds. Having more funds does not give you enough diversification. Instead, in many cases, it may create you portfolio overlapping and leads to underperformance.

· It is not necessary to invest in each category mutual funds to build your portfolio.

· Never invest in mutual funds based on tips.

· Carry out proper analysis and research before making an investment.

· If you are unable to identify mutual fund take advice from expert or CFP.

· If your mutual fund portfolio is generating negative returns, do not panic. Don’t redeem or Stop SIPs. Avoid taking any decision based on short-term market movements.

· Prefer direct mutual funds scheme.

· Always invest in Growth based mutual funds over dividend based mutual funds.

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