In recent times, there has been a bombarding of mutual fund ads running across all types of media. Everyone seems to be telling that a mutual fund is a great investment option.
But do you know how to pick the best mutual fund for yourself? If not, no worries. Sharing with you the top factors, based on which you will be able to correctly analyze and choose the best mutual fund.
The personal objective in Mutual Fund
There are various categories of mutual funds – equity funds, debt funds, hybrid funds, and others. If you want to keep the investment for 1-3 years, you should go for debt find. If your horizon is for 3-5 years, a hybrid fund is your go-to and if you can stay in the market for 5+ years, you must invest in an equity fund.
Furthermore, there are large-cap funds that are the best performing funds and fall in the low-risk zone, then mid-cap funds having medium risk, and lastly small-cap funds that operate at high risk.
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You should not just go ahead and invest in a fund that has done extremely well in the last one or two years. A good mutual fund has performed consistently well in the past 5 to 7 years. Performance consistency is arguably the most important indicator as it implies that the fund can sustain its return percentages and not lose money even in wavering situations.
You are entrusting your hard-earned money to the Fund Manager who promises to get the best returns possible. This calls for action to check the history of the fund manager- how many portfolios does he/she manage and how successful he/she has been in their work.
Expense Ratio of Mutual Fund
The expense ratio determines the amount that the AMC is going to deduct from your earnings as their charges. This can be termed the cost of investment. The expense ratio should be on the lower side. A mutual fund with an expense ratio in the range of (0.6-1.8) % should be sought after.
For each scale of the fund, there is a performance benchmark. For the large-cap funds, the benchmark is Nifty. Anything earned more than Nifty is termed as Alpha. A fund that is performing better than its industry benchmark becomes an obvious go-to option.
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Beta registers the fund’s response to market volatility. Lesser beta indicates that the fund is stable even when the market weather is not so great.
Mutual fund Rating
Mutual funds are rated on a scale of 1-5. A higher rating indicates a better risk-adjusted return when compared to other mutual funds of the same category.