Choosing the right mutual fund can be a bit complex and challenging. There are literally thousands of choices, and several different ways to measure and compare funds than most people can imagine or have time to consider. So, while evaluating a fund on your own, having a systematic checklist of key basic criteria that can structure and simplify your fund selection process comes handy. There are five basic criteria that need to be weighed upon to decide if it’s a good investment.
Goals and their duration: Mutual fund schemes must be chosen carefully in accordance with one’s goals, timeline, and overall financial plan. In fact, based on these factors, you would need to follow an asset allocation plan. Once you know how much you need to invest across different asset classes such as equity and debt, you must choose funds that match your tenure. If your goal is less than three years away, you should consider investing in a debt-oriented fund. For a medium-term goal that is typically between 3 – 5 years, you can consider hybrid equity funds that have exposure to both equity and debt. For long-term goals, equity mutual funds offer a good option. Goal-based customized offers like tax exemption are available for a range of top-rated mutual funds that can be bought at Finserv MARKETS by creating a hassle-free online account.
Fund Performance: It always makes sense to compare funds of same type to evaluate their performance. Only when compared within the same category of funds do performance statistics reveal anything. By the time you come to the stage when you are comparing performance numbers of different funds, you should already have a good idea of how much you will invest in that category.
Risk Tolerance: Investment is usually risky, and it holds essentially true for those investments that can yield you good returns. In general, it is said that the riskier the fund, the more its potential for high returns, at least most of the times. However, this is a simplified view since not all funds are equally well-managed. The real yardstick of risk is whether the fund is able to give you the kind of returns that justify the kind of risk worth-taking. Mutual funds can be bought online based on the fund rating that’s reflective of their performance level compared to other funds in the same category. Platforms such as Finserv MARKETS allow you to compare the performance of top-rated mutual funds in each category before deciding to purchase the funds to suit your needs and achieve your investment targets. So, if a fund has a four- or five-star rating, it means, the fund, compared to similar funds in that category performed better for the given risk level.
Portfolio diversification: Mutual funds, by their nature itself, provide diversification across stocks, sectors, and asset classes. Thus, you can use mutual funds to diversify your portfolio adequately. When you are investing in equity schemes, choose from top performing diversified equity schemes. Ensure that there is a good spread of large-cap mutual funds and mid-cap mutual funds in such schemes, and the fund has been consistent in performance for a minimum of three years. On the other hand, when you are choosing a debt fund, the first thing to do is to choose a fund that matches your investment horizon. Along with that you will have to consider the fund manager’s view on the direction of interest rates and the sensitivity of your fund towards interest rate movement. The idea of diversification is to ensure that your risks are well spread across asset classes, market sectors and the style of fund management. At Finserv MARKETS, you’ll be able to choose from a variety of online mutual funds dispersing across different categories to match your investment targets.
Overhead Costs: Costs like transaction fee and expense ratio are key parameters to consider when selecting a fund. Transaction fee, also sometimes called load reduces your initial investment in the fund, and the impact of that initial cost can be long-lasting. However, in some cases, funds without transaction fees charge higher ongoing fees, so you may want to compare the total cost of your options. Another parameter to be verified is the expense ratio of the fund. The expense ratio is the ongoing cost of the fund, and expense ratios have been the most reliable predictor of future fund performance—in terms of absolute return and future risk-adjusted return—relative to other funds in the same category. Hence, before investing in a mutual fund, it is advisable to check the expense ratio of the fund. Buying an online mutual fund at Finserv MARKETS, gets you to invest in your desired mutual funds without losing much money on these overhead costs.
Choosing a mutual fund can also have several other criteria to be considered. However, these broad criteria should help you narrow down your options in making a reasonable choice. But the most basic factor to consider is how your investment fits into your overall strategy. If you start with your goals, financial situation, duration, and risk tolerance to create an appropriate asset mix, then consider performance and look for low costs, you should be well be able to boil down to that appropriate choice of mutual fund.
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