Mutual funds investment could be one of the effective methods for long term wealth creation.
While the market is filled with various mutual funds, it can be challenging to find a conclusive answer to this question. It can also get confusing looking at several types of mutual funds schemes available in the market. Is there a way to identify the best mutual funds to invest in?
Well, worry not. Here are five steps that will help you streamline your investment while selecting mutual funds.
1. Identify your Goals
The first step you need to do is list down all your financial goals. Next, you can calculate the real value of your goals. The real value of goals can mean their current prices plus inflation over the period of investing. Further, you can categorise your goals into short, medium and long-term goals.
2. Identify you Risk
Different mutual funds have different degrees of risk associated with them. Therefore, your risk appetite can largely influence your mutual fund investment choices. Thus, the second step is highly crucial. You need to honestly and accurately assess your risk appetite to arrive at the right asset allocation for your portfolio.
In simple terms, your risk appetite can mean the amount of risk you can take as an investor.
3. Get your Asset Allocation Right
The third step is asset allocation. It means how much of your money you can allocate to which types of mutual funds to meet your short-, medium- and long-term financial goals after duly considering your risk appetite.
You can look at some of these funds:
- Debt Funds and Arbitrage Funds
These are low-risk funds and are suitable for short term goals. Liquid funds may be deployed for the purpose of building a strong emergency corpus. Ultra-Short Duration Funds are ideal for durations from three months to a year. Long Term Debt Funds and Arbitrage Funds can be suitable for short-term goals with a timeline between one to three years.
- Balanced Funds
These are medium risk funds and are suitable for medium-term goals. Balanced or Hybrid funds can give you the benefits of equity investments with returns over and above inflation and debt investment by lowering your risk exposure.
- Equity Funds
Equity-based funds are suitable for long term goals such as retirement planning. These funds have a higher risk profile than debt-based funds.
4. Understand and Analyse Attributes of Mutual Funds
After you have decided the asset allocation mix best suited to your goals and risk appetite, the fourth step is to identify the suitable funds within each asset class. Additionally, you should look at the following attributes to chart your mutual fund investment journey:
- Performance against benchmarks
Every mutual fund publishes data about the benchmark index against which it is pitted. For example, the BSE Sensex or NIFTY index is the benchmark for some equity funds. Look at the benchmarks of funds and how they have performed in comparison to them.
- Performance within Peers
Check your chosen funds' performance against other similar funds. You can look at their historical returns, ratios, debt profile, management and more to make your judgements.
- Consistency of Performance
This is something that you can look for in all the parameters of the fund.
- Expense Ratio
A fund’s expense ratio is the percentage of invested capital that the mutual fund house charges you to meet the day-to-day expenses related to managing the fund. Usually, actively managed funds have a higher expense ratio than the debt counterparts.
- Exit Loads
These are charges that the fund house imposes on you while redeeming from the fund.
- Scheme's AUM
Asset Under Management (AUM) is the total value of all the assets managed by the scheme. This can give you an idea about the size of the fund house.
Fund Managers' Past Performance and Experience
You can look at the fund manager's profile and past and present performance by looking into the performance of the schemes they have managed in the past and are managing currently.
5. Seek Financial Advice
Finally, as the last step in your investment journey, you should always seek advice from professional financial advisors. They can help you analyse all the above and help you choose funds suitable for your financial goals.
Follow these simple steps to identify the mutual funds to buy for your specific needs,
Mutual Fund investments are subject to market risks, read all scheme related documents carefully
