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How to Choose a Mutual Fund in India?

First of all, mutual funds are an investment vehicle that has a portfolio of stocks and bonds. There are different types of mutual fund schemes available for investors as per their requirements and goal. Choosing a mutual fund is different for every individual.

Mutual Fund in India

The selection can be done based on several factors like risk tolerance, return expectation, investment horizon, etc. The assets can also be determined based on factors like past performance, assets under management, fund manager experience, and expense ratio. In this article, You will study mutual fund selection in detail and also find a list of Ebooks for Mutual funds available online.

Important Factors to remember while choosing a Mutual Fund

Here are some of the key factors that you must remember before deciding on how to choose a mutual fund in India. Once you have a clear picture of these factors, you will find it easier to choose where to invest in.

1. Investor’s goal

The starting factor of your decision must be your goal along with its target date, return expectations, and time frame before you invest in any mutual fund. If you do not have a clearly defined goal, then you might get distracted, doubtful, or stop from thinking about your investment. Your goal can either be short-term such as making a down payment for purchasing a house, international holiday or buying utility goods or long terms like college education fees or retirement. Based on this factor, you will be able to choose the right type of mutual fund you must invest in, such as equity mutual fund, debt mutual fund, or hybrid mutual fund. Your expectations from the investment greatly determine your choice of a mutual fund.

2. Risk tolerance

Before investing in any mutual fund, you must analyze the risk level associated with that investment. You must always remember to “Think before you leap”. Check whether the investment aligns with your risk tolerance. In equity mutual funds, your invested money is subject to ups and downs in a short period. Although it provides higher returns when compared to other mutual funds, it is not suitable for low-risk investors. It is best suited to aggressive investors who are looking to invest for the long-term. The debt mutual funds are comparatively more stable but offer lower returns. It is best suited for conservative investors. Therefore, understand your risk profile and then select an appropriate mutual fund accordingly.

3. Liquidity

You must opt for liquid funds if you are looking for a good return in the short-term. Generally, an investor is capable of ascertaining the right time of investment. It is a personal decision of an investor to determine whether he will need the money shortly before investing it anywhere for the long-term. If you can afford to put your money in equity funds without having to worry about the ups and downs of the market, you sure can go ahead.

4. Investment strategy and approach

Investment strategy plays a crucial role in giving you a successful investment portfolio. Every fund house has a different investment approach and investment strategy as per their schemes. If your investment philosophy conflicts with the investment strategy of the scheme then you must step back from it. Understanding your investment strategy and comparing it with those used by the mutual fund schemes prevents you from investing at an undesirable place.

5. Fund performance

To better understand the fund performance, you must invest in funds considerably for the long-term and not the short-term. By doing this, you can ensure that the fund faced inconsistent market cycles and also monitor the returns. If your fund performance fails to cross the benchmark over five to 10 years, then it means the fund performance is going to remain the same in the future too. Hence, the fund performance is not good. The fund performance can be determined by doing a background check of the fund management team and their manager. An experienced, stable, and strong fund management house with a good track record will be a beneficial option to invest in. Once you have selected your desired funds, you can track mutual funds with PAN number as well and map their performance.

6. Expense Ratio of the asset

The fee charged or the commission taken from the investors to manage their investments is known as the expense ratio of the asset. It is the fee of the fund manager that is levied to ensure profits on the investments. Therefore, as a wise investor, you must select a lower expense ratio fund house to reduce the impact on the total investment portfolio. It is believed that the expense ratio is lower when the Assets Under Management are higher.

7. A load of entry and exit

Entry load is the fee charged by the fund management team to begin the investment strategy in the mutual fund scheme. The exit load is the fee charged for exiting the fund scheme. The entry load is not active in most fund houses but the exit load continues to be charged. The exit load is only charged when the investor decides to exit the scheme before the stipulated time. Therefore, you must always look for fund schemes that have minimal or zero entry and exit load.

8. Tax consideration

As an investor, you must also consider tax levied and exempted on different terms of mutual funds. For long-term gains in equity funds, 10% or more tax is levied and an amount of Rs. 1 lakh is exempted. On the other hand, for short-term gains, 15% tax is levied. Indexation benefit can be availed for realized capital gains in debt funds.

Investment in mutual funds is a common phenomenon in India; new investors always look for guidance on how to choose a mutual fund in India. Let us look at certain books on mutual funds to understand the right investment planning:

  1. Indian mutual funds handbook  by Sundaran Sankaran
  2. Systematic investment planning-SIP by CNBC TV 18
  3. How to make a fortune through mutual funds by Ashu Dutt and Arshiya Dutt
  4. Guide to Indian mutual fund by Jitendra Gala and Ankit Gala
  5. 108 questions & answers on mutual funds & SIP by Yadnya investments
  6. Mutual funds in India: structure, performance, and undercurrents by Rakesh Kumar
  7. Common sense on mutual funds by John C. Bogle
  8. Bogle on mutual funds by John C. Bogle

On a closing note 

The selection of the right mutual fund is crucial for a successful investment portfolio. Every investor must set goals and objectives and then follow the path to stay focused. Hence, remembering the relevant factors and mapping the investment target is very important before deciding the right move. The factors discussed above will help you in finalizing the right mutual fund for you. Therefore, determine all the parameters carefully to choose which scheme is most suitable for you. Keep tracking your selected mutual fund continuously to check its fund performance.

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