A mutual fund is an investment tool that pools money or funds from a group of people or investors with a mutual aim to earn a good return on their investments. Mutual funds are managed by asset management companies (AMCs) that hires fund managers to invest the money in various stocks, bonds and securities to earn good returns. To put it simply, several investors with similar risk profile and return expectation pool in their money to create an investment avenue known as mutual funds. Mutual fund investment is among the most popular forms of investments in India as it offers good returns with marginal risks. Securities and Exchange Board of India (SEBI) regulates the mutual funds in India.
If you are a first-time investor, then the number types, categories and subcategories of mutual funds can be confusing. You must know that mutual funds are classified according to different criteria like structure, asset class, investment objective, speciality and risk. Broadly, based on asset classes, there are four types of mutual funds: debt funds, equity funds, money market funds and hybrid funds.
What are the parameters to judge the best mutual funds?
The foremost criteria to gauge mutual fund investment is to track returns. Returns are easiest to measure and compare across all funds. But choosing a mutual fund solely on the basis of past returns is not advisable. To get an overall insight about any mutual fund, you need to step further from the focus, solely on past returns, and keep in mind the following three parameters:
- Check for Net Asset Value: Net Asset Value simply means the net value of any entity. It is calculated as the total value of the entity’s assets minus the total value of its liabilities. Checking the NAV of any fund will provide you the details about how much a fund has gained over a period of time. For example, you can note down the NAV of a mutual fund, and recheck it after a period of six months. You can then decide the best mutual fund for investment. You must, however, keep in mind that only the NAVs of similar mutual funds should be compared. For example, you can compare the NAV of a particular diversified equity fund with another mutual fund of the same classification. This is a key factor while making mutual fund investments.
- Check the benchmark index: Benchmark index is generally used as the key factor for portfolio management in investments. In case of any mutual fund investment, a benchmark is a standard against which the performance of the mutual fund is measured. Usually, broad market and market-segment stock and bond indexes are used to set a benchmark. The SEBI has made it compulsory for all mutual funds to declare the benchmark. You must, however, keep in mind that a mutual fund has to be compared with its own stated benchmark, and not other against others. This can help you to select the best mutual fund.
- Track the time period and market conditions: In case of any mutual fund investment, tracking the time period is of crucial importance. The time period should be the same as the fund type it is meant to be invested in. For example, if you are comparing equity funds, then you must track the time period ranging between three to five years. Similarly, in the case of funds like cash funds or liquid funds–which are return instruments with short maturities–you must select a six month time period. It is also important to see whether a fund has withstood market period over a long period of time. You must remember that any mutual fund will provide good returns in a bullish market, where market conditions are favorable. But for selecting the best mutual fund , you have to see whether the fund has been previously exposed to adverse market conditions like a bearish market. This will help you select the right mutual fund investment.
Conclusion: Before investing in any mutual fund, you must always keep in mind that mutual fund investments are subject to market risks. If you are looking to invest in mutual funds with low transaction costs, then mutual funds on Finserv MARKETS could be the place for you. It also offers you the option to divide your funds into smaller parts across different companies so that you make the most out of your investment portfolio. At Finserv MARKETS, your funds will be in safe hands with professionals who have expertise in reading and analysing the investment market and helping you gain higher returns on your mutual fund purchases.
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