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how to select best mutual fund

How To Select Best Mutual Fund

Do you have Best Mutual Fund in your portfolio??

How you have selected the one??

Whenever you start looking for investment avenue mutual fund is among the top in the list.

you always look for the best mutual fund. There has been a massive campaign of “Mutual fund Sahih Hai” with celebrities like MS Dhoni, Sachin Tendulkar, etc. which results in the quick recall.

Also, another important reason is an investment in the best mutual funds doesn’t require a large sum. Also, there is flexibility in the sense it can be stopped or started at any time. By SIP (systematic investment plan) route an investor can plan long term investments to achieve planned goals.

With the advent of technology investment in best mutual funds is quite easy but the selection is not. Though there are numerous channels and information is available on digital platforms.

 Though it is said that if you go for investment in the mutual fund for long term you would never lose money and no mutual fund has given negative return, but that doesn’t mean that you invest in any fund blindly.

There are more than 2500 schemes of 44 fund houses in the offering, researching them is a mammoth task but following a simple set, selection parameter would help in selecting the best among the lot.

Here is the simple process to select the best mutual fund, if followed diligently would definitely help in selecting the best scheme.

Define Purpose & Risk tolerance

Purpose

Today we believe in goal-based investment so before investing you need to answer for what purpose you are setting fund aside. Is it for long term, medium term or short term?

As a common saying high risk high return, that’s hold true for Mutual Fund also. For long term you can take high risk hence opt for equity or mid & small cap funds, moderate risk for medium term opt for balanced fund and low risk for short term in this case opt for liquid or debt fund.

You also need to answer your risk appetite. If you have the high risk appetite and not disturbed by sharp increase and decrease in value, you need to select Equity mutual/s on the other hand if your risk appetite is not high then you need to settle for balanced or debt fund.

This step alone would filter out 60% of crowd.

Fund Manager & Tenure & his objective

Best Fund Managers

The fund manager is the most important person as he is responsible for devising the strategy and implementation of the fund. He picks the stocks, bonds, or other assets for the fund. He is responsible for generating alpha (returns) while controlling risk, he places investors fund in various instruments to achieve the goal. So while selecting fund manager 2 things need to be considered

a)Tenure with fund

Generally, a higher tenure is considered as the fund has been taken care of and the philosophy of fund manager is matching with that of the fund. It also means he is generating returns consistently. Generally, a tenure of 7 -8 yrs is considered good. Never ever go for fund having fund manager tenure less than 5 yrs.

b)Peer Performance

Another factor is to check their performance as compared to their peers. Sometimes a fund manager holds multiple funds, it would be wise to check the result of other funds also. The data is easily available.

AUM – Asset under management

Asset Under Management

AUM or fund size can help in filtering further crowd Funds having fund size of over 5000 cr are considered to be a safe investment. A high fund size reflects the popularity and acceptability of the fund in the market.

Funds with a relatively smaller size generally don’t get the requisite management bandwidth, as funds may not generate a required return for the fund management house.

Also, the best managers are not placed with small funds.

An important point to be noticed is that very large funds are also not good and should be avoided. The management of these funds is difficult and also stock selection becomes limited.

For example, a fund with AMU 50,000 Cr., to add a stock to this fund, the stock should have a large market cap. Else, it will not be possible for the fund manager to add that stock.

Performance of the fund

Performance measurement is important as this is what for you have invested your money. The best is to look for the past performance of 1,3,5,10 and since inception returns of the fund.

Though the past performance doesn’t guarantee a future trend it does gives a fair idea as to how the fund has performed and what is expected. Past performance can be used to judge and compare the competition also.

In this case, a simple mathematic need to be done. First select funds which you want to judge, then take out there 1,3,5,10 and since inception returns. Now give a weighted score to all these like for 1yr return score is 5 for 10 years 10 and henceforth. Now multiply the return percentage with the weight and get the total. The highest is the best, this is by far the easiest way to rank MF based on there present and past return.

It does give good results, I use all the time.

Expense Ratio & turnovers

Running mutual fund schemes requires money, money to pay office expenses, management, sales team, research team, etc. the percentage of money that goes toward these heads is termed as an expense.

In simple terms, it’s the money you pay to fund a house to manage your fund. After selecting mutual fund you need to scan the expense ratio, the lower the better.

Even a 1 % difference would make a huge difference in the long run. (Compounding factor). You also need to look for the turnover rate of the fund. The turnover rate basically tells how frequently the stock has been bought and sold. The higher rate means high cost and low return.

Diversification

This is last and also important. The idea is simple to avoid the same kind of fund from different fund houses as the basic purpose of diversification would be defeated. Also you not have 15-20 different mutual funds. All you need to have good 4-5 funds of different themes.

Following these simple selection criteria, you would be able to pick best among the lot.

I am sure of that.

Please do read for better clarity on Mutual Funds

All About Mutual Fund

Types of Mutual Fund

8 thoughts on “How To Select Best Mutual Fund”

  1. Shrinivas s v

    Very good information to understand about how to select best scheme for the beginner.
    Thank you

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