How to select right mutual fund ?
Investing in mutual fund is not like one size fits all, one must select mutual fund scheme which is most suitable to meet your objective and risk profile. A young individual who has just started his career can afford to invest in more risky mutual funds like mid cap and small cap. A middle aged individual would like a mix of growth and risk, so balanced mutual funds will be a better choice. A retired individual should seek refuge in debt mutual funds to protect his capital or invest in a hybrid fund which provides nominal exposure to equity investment.
Apart from selection of right mutual fund type, we have to evaluate mutual fund on below listed parameters before investing.
Select fund based on your investment horizon and risk taking capability.Invest in equity mutual funds only if you have investment horizon of more than 4 years. In short term chances of making a loss are high, so invest in debt funds if you want to invest for short term.
In equity funds also there are sub types like large cap,small cap etc.If you classify these equity mutual fund types based return and risk grade on scale of 1 to 5 then we get below result. "5" signifies highest grade and "1" signifies lowest grade.
Thus "Small cap" have potential highest return but are highly risky,same time balanced funds have lowest risk but may provide lower return. As you grow older, you should lower percentage of risky investment. As a thumb rule, 100 minus your age should be percentage of equity investment in your total portfolio. For example if your age is 30 years, then you should invest 70% (100-30=70) into equity.
If you want to save tax on equity investment, then invest in tax saving mutual funds(ELSS). Gains from any investment in equity oriented mutual funds (minimum 60% investment in equity) is exempted from tax if you stay invested for minimum 1 year.
2.Fund rating and performance
It is advisable to invest in 5 or 4 star rated fund from reputed fund house. Check funds short term(<1 year) and long term performance (4 years or more). Better go for fund house with good number of star rated funds in their kitty. Kindly note that past performance of mutual fund does not guarantee future performance so track fund performance regularly.
Check for how long the fund manager has been managing the fund. If fund manager has changed recently, then the fund performance in past may not be repeated in future, as the new fund manager may not have the same acumen in stock selection.
Check total fund corpus as compared to pier funds. If fund corpus is too large then managing the fund becomes difficult, which may result in muted returns in future.
It is ratio of total fund management cost to total fund assets. Lower expense ratio is preferred as higher expense ratio reduces your returns. If fund has 2% expense ratio and total returns are 10% then actual returns will be reduced to 8%.
Invest in maximum 4-5 mutual fund schemes spread across 2-3 fund houses. Mutual funds directly invest in stocks, so diversification is automatically achieved and thus there is no need to invest into too many mutual schemes. Too many mutual funds will lead to duplication of stocks in which your funds invest and also make tracking investment difficult.
Invest through SIP mode in equity mutual fund to reduce your risk on investment. If you do not have any experience of equity investment then consult a qualified investment adviser.