Choosing the Right Mutual Fund!

“Koi kuch bhi aake bech ke jaata hai!!” – that is what the majority of investors experience when they invest in Mutual Fund (MF) schemes. There are over 2500 schemes and selecting a good one is like finding a grain of sugar in a salt shaker! So, how will you cherry pick the right fund?

Mutual Fund is the most convenient and cost effective manner of investing. By definition, it is money pooled in by various investors and deployed into diversified holdings, which is professionally managed by a fund manager. MFs are broadly categorised into Equity (high risk, high return) and Debt Fund (low risk, low return).

Here are some pointers to consider while selecting the right mutual fund:

‘Why’ are you investing?

Why you invest is more critical than what you want to invest in. Define your financial goals and stick to those. Every individual’s portfolio is distinct, like ones finger print. So avoid replicating others’ investments as these will be detrimental to yours.

What is your ‘Risk Appetite’?

Understand your risk appetite. Don’t invest in Equity MFs if you can afford only minimal risk. If you are risk-averse, opt for the various Debt MFs which are safer. However, if you are young and have plenty of earning years ahead, then Equity Fund is the right choice.

‘Time Horizon’:

Defining a time horizon is one of the most important parameters prior to selecting a MF. If the time horizon stretches beyond five to eight years, then an Equity Fund is ideal, else a Debt  Fund is preferable.

Promoter of the Fund:

Good promoters or management to a MF House is akin to fine lineage to a thoroughbred race-horse. It matters. Select the right management prior to selecting the schemes.

Past Performance:

Short term track records don’t matter in MFs, what matters is long term track record. Separate the men from the boys and invest in funds that have done well across market cycles, through thick and thin, in the long run. MF ratings are irrelevant as too many people do Star ratings, but these are based on past records and do not indicate their future performance.

Fund Managers:

They run the show and it’s important to note their qualifications, experience and investment styles. Do a back-check on them, use Google.

Avoid NFO’s (New Fund Offers):

There have been several instances where advisors or bankers or Financial Institutions push new funds down the investors’ throats. Why shouldn’t they? After all, the commission they earn is mouth-watering! Avoid investing in funds which have no track record. NFOs also have higher expense ratios. Stick to funds with a long history of existence. I fail to understand why clients prefer a new scheme at Rs 10 per unit to a Rs. 200 per unit of an older scheme. What is important is the percentage return. A 20 per cent return on Rs 10 and 20 per cent return on Rs 200 is the same.

Factsheet:

Factsheet is the biography of a fund, it reflects all the information about the scheme.

Expense Ratios:

Did you know that all funds bear a hidden cost known as the Fund Management Charge or expense ratio? It ranges from 0.20 per cent to 3 per cent per annum. This charge is factored in the NAV of the fund and amortized over a year, so very few investors even notice this. Expense Ratios affect the performance of the fund. NFO’s(New Fund Offers) bear higher expense ratios.

Diversification:

Regardless of the level of risk tolerance, one should adhere to the principles of effective diversification i.e. the allocation of investment assets across different MF schemes. Do not over expose in a one particular scheme or fund house. Also, avoid over-diversification, which makes it tough for you to track it. A healthy MF portfolio should comprise not more than ten-twelve funds.

Taxation:

Gold Funds are taxed as per debt. Did you know that debt funds with dividend options are levied with DDT (Dividend Distribution Tax) of over 14 percent?! Overseas or International Funds and other offshore funds are taxed as per debt funds. Be informed of taxes prior to investing.

Mutual funds have emerged as the best investment avenues in terms of variety, flexibility, diversification and liquidity, as well as tax benefits. God is in the planning and the devil is in the details! So educate yourselves prior to investing into Mutual funds.

Mehran Felfali
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About Mehran Felfali

Owner of investment and consultancy firm – ‘Ethix’ is open to answering any relevant queries on handling your finances. Mail him at: mehran@ethix.net.in or visit his website on www.ethix.net.in

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