Investing in a mutual fund is one of the many ways through which you can accomplish wealth creation. But then, with so many different funds from various fund houses to choose from, how does one ensure that they pick the right one? If you’re someone who is finding it hard to choose an investment fund to invest in, then this might help. In this article, we’re going to be looking at how you can pick the right fund. Let’s begin. 

How to choose and evaluate mutual funds?

There are quite a bit of factors that you will have to take into consideration to ensure that you choose the right fund to invest in. Here’s a quick look at a few of the most important ones.  

1. Investment Objective 

The first factor that you would need to take into consideration is your investment goal. Doing so can help you ensure that the mutual fund that you invest in produces returns that are in line with your expectations. So, for instance, if your financial goal is to save up for retirement, you can consider investing in a mutual fund that invests either in equity or in both equity and debt instruments. 

2. Risk Tolerance 

Once you’ve picked out mutual funds that are in line with your investment objective, the next step is to match them with your risk profile. Continuing on from the previous example, since you’re planning on saving up for retirement, investing in equity mutual funds or hybrid mutual funds is what might work best for you. 

However, which one do you pick from these two types of funds? Here’s where the risk profile or tolerance comes into the picture. For instance, if you’re an individual who is a moderate risk-taker, you may want to invest in hybrid funds. On the other hand, if you’re a risk aggressive investor, then investing in equity mutual funds may make more sense. 

3. Fund Management

The next factor that you would need to consider is the way the investment fund is managed. Mutual funds can be broadly classified into two types - actively managed funds and passively managed funds. Actively managed funds have a dedicated fund manager who is responsible for creating and managing the basket of stocks in the mutual fund. 

They also routinely reorganize and rebalance the mutual fund to ensure that it satisfies the fund goals. Passively managed funds, on the other hand, usually track an equity or debt index and may or may not have a fund manager. Since such funds are meant to replicate the performance of the index that they track, they aren’t managed, reorganized or rebalanced routinely. 

If you’re looking for funds that outperform the broad market and are willing to take on risk, then actively managed mutual funds may just be what you’re looking for. However, if you’re happy following the market and don’t like taking too much risk, then passively managed mutual funds are what you need to invest in. 

4. Fund Performance 

Another very important factor that you would have to consider is the performance of the mutual fund. There are dedicated online tools that are designed to provide you with in depth information regarding the past performance of a mutual fund. 

You can use them to get to know how the fund performed during different market situations. Once you’re satisfied with its performance, you can then proceed to invest in it. That said, keep in mind that past performance of a mutual fund isn’t a guarantee of its future performance. Therefore, you should exercise caution when using this factor to evaluate investment funds. 

Conclusion

In addition to the ones mentioned above, mutual fund expenses is another factor that you would have to consider. Different fund houses charge different expenses for running a mutual fund. Generally actively managed funds have a higher expense ratio than passively managed funds. It is advisable to opt for mutual funds with low expense ratios since they don’t usually eat into your profits. 

Investing in a mutual fund requires you to have an active demat account in your name. Visit Motilal Oswal right now to open a demat account and a trading account for free through a paperless account opening process.

 

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