How to pick Best Mutual Fund Scheme?

Chakshu Arora
Tax Professional

January 18, 2018

The best mutual fund scheme does not mean the best in return but the one that is best suited suited to the investor’s risk profile and goals and the one that is good in its peer group. So, it’s necessary to look at the following points to see how one can invest in the best mutual fund scheme.

Investment goal: The most important step in selecting a scheme is to have an investment goal and know the reason for your investment and for how long do you want to invest. Even a fantastic fund selection without having any investment goal is completely useless.

Ratio analysis: It is always a good idea to check for risk and return ratios and also the ALPHA (performance ranking of the fund manager) consistency level before investing.

Total expense ratio: A very important parameter to be looked while investing. All fund management and distribution related expenses are borne by the scheme. So, this means high expense ratio will affect the fund’s returns. Lower the better unless some extraordinary return is expected by paying higher expenses for fund management.

Do your homework: Buying large cap well diversified good quality schemes is a safer better than investing in opportunities funds, internationalfunds, contra funds as a staple part of one’s portfolio.

All funds in India are no load funds: This simply means there is no sales cost, which is all the money get invested. So for a large cap equity fund it makes sense to invest directly rather than have someone pick for you.

Fund Manager: Mutual funds are a process oriented approach but still fund manager is the ultimate decision maker and his experience and expertise counts a lot. Also keeping a track of the performances of other funds he is managing helps. So, knowing the fund manager always helps.

Demonic watch on the asset management charges: A fund starts attracting a lot of investors as it starts doing well. So as it assets start increasing its asset management charges should drop. It is always beneficial to keep a watch on this.

True to label: When buying mid cap fund, it is a mid cap fund, simple.If a fund claims to be a mid cap fund, it should not be buying large or small cap fund just because mid cap are currently out of it favour.

Philosophy matching: Some fund houses are calmer and cooler as to others. Lets understand this with an instance, Franklin India blue chip is a ‘growth’ oriented fund whereas Templeton India Growth fund is a ‘value’ oriented fund while HDFC mutual funds does not classify itself into a ‘growth’ or ‘value’ label. So, see what suits you and then invest.

Scheme asset size: The parameter is different for debt and equity schemes. In debt the comfortable asset size should be thousand of crores as the investment value per investor is higher while in equity it should be hundred of crores.90% of total assets under management (AUM) are invested in debt funds, so the scheme selected by you should have a considerable AUM as less AUM in any scheme is very risky as the investors and quantum of investment is unknown.

Hope, these certain pointers help you choose the best mutual fund according to your needs. But as the popular saying goes “There is no scientific way to choose tomorrow’s best funds today”, so a constant review is always required for desired result.

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