Ways to Choose a Mutual Fund

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The Indian mutual fund industry has undergone transitional change in past few years. It has covered a long journey and has accumulated the assets under management (AUM), growing at an annualized rate of 20% between September 2006 to 2009. Ways to Choose a Mutual Fund in India involves various steps such as, selecting those funds whose objectives match with those of the investor, evaluate the earlier performance of the funds, and consider the costs of the fund.

The various steps in Ways to Choose a Mutual Fund in India must be followed carefully by the investors for this will ensure that their money are invested in funds that suit their needs.

How to select Mutual Funds

It has shifted from offering traditional equity and debt instruments to specialized products and schemes, such as exchange traded funds (ETF), asset allocation funds, arbitrage funds and fund of funds. All these make it difficult for investors to select the scheme that suits their needs.

Here are some easy steps to be followed while selecting for a perfect fund that suits your requirements -
  1. Investor's objective & risk appetite : The objective of the investment fund must be similar to that of the investor. The objectives could be consistent income, high returns, tax concession, retirement planning, etc. Equity funds are more tax-friendly, debt funds aim at short-term regular income. The fund should be chosen according to the investor's risk benevolence. The rule of high returns high risk. Low-risk investors should invest in debt funds, which are ploughed in government securities or high rated debt papers. High-risk investors should go for equity funds (well diversified portfolio).

  2. Past performance & Fund Management : It is important to consider how well the fund has performed in the past with respect to its benchmark securities or other similar funds. Though the past performance of a fund does not define its future performance. A fund should be compared with the same category of funds. So, the performance of a mid-cap fund cannot be compared with that of a large-cap fund. The stock picking and market timing abilities of the manager are equally important to choose a fund for investment. Experienced manager can forecast the market with accurately.

  3. Fund size : The size of a fund is important because very small-sized fund is constrained with the problems of high charges and expenses. On the other hand, very large funds often negatively impact the performance. Therefore, one should ideally go for a mid-sized fund as it balances the investment elasticity and costs.

  4. Fund costs : These involve the operating costs of running a fund and include marketing and selling expenses, audit fees, custodian fees, etc. The expense ratio should be compared with similar funds and calculated accurately to estimate the real return of the investment.

Last Updated 1/5/2012

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