5 Things to check before selecting a Mutual fund

15 February 2022
5 Things to check before selecting a Mutual fund

Investment in mutual funds is one of the better preferred choices among investors today owing to their attractive returns and diversified portfolio. However, there are various types, categories and subcategories of mutual funds available to investors.  A suitable mutual fund scheme for an investor is the one which suits his/her investment objective and risk appetite among other factors.

While opening a mutual fund account is a seamless and convenient process these days, it is extremely important to understand how to pick the right mutual fund to invest in. We have compiled a few things that you keep in your checklist.

  1. Investment Time-Horizon and Goals
    Before investing in any fund, you must first identify the time horizon or goal you will be investing for. Is your objective long-term capital gains, or is current income more important? Will the money be used to pay for college expenses, or to fund a retirement that's decades away? It can be either as short as 1 day or as long as more than 5-10 years. Different fund categories work best for different time horizons. The market can be highly volatile in the short term but tends to provide higher earnings growth over time.
  2. Consider the Taxes Your Investment Attracts
    Gains on your mutual fund investment are taxable under the Income Tax Act based on the holding period and the applicable tax rate. Tax consideration is something that investors, especially beginners, must not overlook. It is important that you inquire of the tax liability arising from a particular scheme, before you plan to invest your money in it and understand the overall effect of it in terms of returns due to taxation
  3. Check the Expense Ratio
    The commission or fee charged to investors for the proper administration of their investments is referred to as the cost ratio. It is essentially the fund manager's fee, which is charged to all investors in order to ensure that profits are made across all assets.
    As an investor, you should seek out mutual funds with a low expense ratio. This is because, while the percentage may appear less now, when applied to your entire investment portfolio over a long tenure, it has a significant influence. In general, lower the expense ratio, the higher are the net returns of a mutual fund scheme.
  4. Exit Load
    An exit load is a fee levied when you sell your units of a mutual fund within a specified tenure. This is only charged if investors exit within a particular tenure. This is done to discourage early exits and financial outflows from fund houses.
    It is imperative that you invest in a fund with a low exit load, and more importantly stay invested for the long term
  5. Performance of Fund
    The performance of a fund is crucial. It should be taken into account for a suitable period of time. But note that past performance is not everything, as it may or may not be sustained in the future. A good mutual fund is one which is able to generate good returns for its investors consistently over a period of time and not just whirlwind returns. The fund should be capable of providing consistent returns in both bullish and bearish periods of the stock market.

    Check whether the fund has been subjected to several market cycles. Look for consistency rather than ranking. Go for longer-term returns (3-5-7-10-15 years) for equities. Different kinds of debt funds must be assessed on different time-frames.

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