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Essential Guide For Picking Mutual Funds in 2019

May-31-2019Blog by – Mr. Ashish AjmeraRead Time: 4 Min.Word Count: 98146 Essential Guide For Picking Mutual Funds in 2019

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Mutual funds have been an extremely popular choice for investors in recent years and how to choose the best mutual fund to invest has clearly been a pertinent question for investors. The widespread acceptability of mutual funds schemes is evident in the strong investment flows. Assets managed by the Indian mutual fund industry surged from Rs 22.71 lakh crore in March 2018 to Rs. 24.58 lakh crore in March 2019, representing 8.25% growth. The proportionate share of equity-oriented schemes is now 42.5% of the industry assets in March 2019, up from 41% in March 2018. The proportionate share of debt-oriented schemes is 29.1% of industry assets in March 2019, down from 35.3% in March 2018.

Individual investors now hold a higher share of industry assets, i.e. 55.1% in March 2019, compared with 51.4% in March 2018. Equity funds clearly remain an attractive destination for investors. The assets under management (AUM) of equity funds stood at a record high of Rs 7.73 lakh crore at the end of March 2019 as against Rs 7.50 lakh crore in March 2018, an increase of 3%. During 2018-19, the SIP (Systematic Investment Plans) accounts also grew by 51 lakh to 2.62 crore from 2.11 crore in March 2018.

Given that investing via the mutual funds is turning to be a valuable and convenient proposition, here is your guide for choosing best mutual fund to invest in an effective manner:

Define your financial goals in clear and measurable terms
It is extremely important to define your investment objectives in clear and measurable terms. One should be able to foresee the trend in future expenses and also be able to estimate the current flow of savings in order to arrive at the likely amounts needed to be invested. This would ensure that you allocate sufficient funds to various mutual funds schemes. Also pay attention to the time horizon i.e. be certain about around when you should achieve your financial goals.

Know the investment objective of the fund
The first and foremost factor for deciding about a particular fund is the investment objective of the scheme. Typically, the mutual funds are meant for retirement, education or other long-term financial goals. So it is critical to make an informed decision before investing your hard earned money into the mutual funds. Remember that the performance of the fund would depend upon its investment objective and you have to ensure that it is aligned with your financial goals.

Focus on your risk appetite and financial needs
Selecting the best mutual fund does not just mean choosing to invest in the fund which is providing the best returns. An investor has to think about factors like his risk appetite and financial needs before deciding to put his money in a specific instrument. If you are thinking about parking your funds for a very high duration- say around 15 years, then it makes sense to think about funds which can outperform over a long term and which have good quality stocks with sound businesses.

Check the Alpha of mutual funds schemes
Investors also need to look at the Alpha of the fund. Alpha, in simple terms measures the difference between a fund`s actual returns and its expected performance. Alpha tells us what extra or less the fund manager has generated out of a given portfolio of stocks in comparison to benchmark. Investors can check it out on a regular basis to see if the fund has been able to generate positive alpha on a consistent basis.

Track the business environment and macroeconomic scenario
While picking up high performing mutual fundsto invest is a relatively simple task, investors also need to keep an eye on the business environment for the major companies which are part of a fund. There is a possibility that because of a short term or temporary factor in global markets, the current performance of the fund is getting affected.

Analyze the performance of fund manager
Past performance of fund manager is also a pertinent factor to be considered while selecting a mutual fund. An investor has to analyze the returns delivered by the schemes previously managed by the manager. Also check how long the manager has been heading a particular scheme.

Remember to check the expense ratio
Expense ratio is also a critical factor as it covers all fund management and distribution expenses. The expense ratio measures the per unit cost of managing a fund. It is calculated by dividing the fund’s total expenses by its assets under management. A fund having high expense ratio will lessen the returns for investors.

Keep these factors in mind for debt funds
Debt funds tend to invest in government securities/corporate bonds and other fixed income instruments. However, an investor has to keep in mind that even such bonds are subject to.Credit risk i.e a bond issuer will not make the coupon payments or principal repayment to its bondholders. There is also the Liquidity Risk meaning that an investor might not be able to sell his or her corporate bonds at correct time due to stress in markets. A rise of a drop in interest rateswill also have an impact on performance of debt schemes.

Conclusion:

Remember that Mutual funds are of different types. However, generally speaking, for investors who have a high risk appetite, it advisable to invest in equity mutual funds which typically tend to provide with the highest amount of returns in medium to long term though these investments are exposed to short term fluctuations in share markets. For investors with a low risk appetite, investment in debt mutual funds is a good idea which generally offers better returns than bank fixed deposits. Among these broad categories, one can filter out the ideal mutual funds from various schemes and decide to invest accordingly.

Also read: Six Factors Which Make Mutual Funds Attractive for Retail Investors

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