Choosing an equity mutual fund for your portfolio demands a two-phased thorough selection process. The first involves determining your financial goal, as well as its time horizon and a risk tolerance evaluation. The second phase is finding appropriate funds and examining various risk parameters by seeking specific information about the funds. An investor must consider details on the fund’s portfolio, track record, fund managers, expense ratio, benchmark, and how the fund has done over time in comparison to its benchmark.
Things To Keep In Mind Before Choosing A Mutual Fund
1. Investment Objectives
The first step in choosing a mutual fund is to determine your objectives – the time frame in which you want to invest, return expectations, and so on. These factors will help you select the fund that is best suited to your goals. Your investment goals could be higher education, a down payment on a home, or even long-term aspirations like retirement. Based on your objectives, you will be able to determine which mutual fund category is best-suited.
2. Risk Tolerance
One of the most important things to consider before investing is your risk tolerance. This means determining if you prefer to play it safe or accept some risks, as well as whether you have a high or moderate risk appetite. You can bear market volatility and choose the funds to invest in based on your risk tolerance. Because risks and returns are directly proportional, decide if you want to adopt a risky or conservative strategy for mutual fund investing. Equity funds are appropriate for investors who desire to accept high risk in exchange for a high return.
3. Investment Horizon
Investment objectives and time horizons are strongly intertwined. You can actually establish your goals according to how long you wish to stay committed. Long-term goals allow you to focus on growth-oriented equity funds because you’ll have plenty of time to ride through market volatility. Moreover, your investment horizon will help you determine the SIP amount for every period for a target wealth.
4. Which Mutual Fund Category For Which Goal?
Every mutual fund scheme has a specific investment objective. You must ensure that the scheme’s investment objectives and risk level match your investment goals and risk tolerance level. An equity mutual fund is a suitable option for an investor whose objective is wealth creation in a long term investment horizon in exchange for market-linked volatility. A debt fund is suitable for investors with a short-term investment objective of parking their emergency funds.
5. Fund’s Performance
Before investing, investors should analyze the mutual fund scheme’s fund performance. Compare the fund’s 3-5-year performance to the benchmark, as well as the fund’s category and consistency of performance. You should compare your scheme to others in the same fund category. Benchmark indices serve as a benchmark against which a fund’s performance and asset allocation can be measured.
6. Fund Manager
Fund managers play an important part in contributing to the success of the mutual fund schemes chosen. As a result, it is critical that an investor conducts due diligence on the fund manager they choose to manage their investments. This would entail looking at the fund manager’s previous experience. This contains the number of years he or she has spent in this position, as well as previous performance and success rates. The higher a fund manager’s success rate, the more trustworthy he or she is in terms of effective fund management.
7. Expense Ratio
Because mutual funds are managed by professionals, all funds have some costs and fees, which include managerial and operational fees. It’s crucial to verify the expense ratio because even a small change might have a huge impact on your wealth.
Starting your investment journey can be intimidating. As you get started and understand more about investments, investing will become a healthy habit that will help you grow wealth.
Related: 10 Best Mutual Funds to Invest in 2022