While you might wish to tap into the wealth-building benefits of online trading, the technicalities of the process might simply overwhelm you. This is why a significant proportion of investors choose to begin their investment journeys with mutual funds instead. Such funds invest the pooled money from a large group of investors into various types of securities on the behalf of the investors. This eliminates a sizable portion of the arduous decision-making that’s involved in stock market trading.

While there are different types of mutual funds available in the market, you need to conduct exhaustive research to find funds that are best for you as an investor. Since the word ‘best’ cannot be uniformly applied to all investors, you have to assess several factors to determine if a fund is just good in terms of market parameters or if it’s the best fit for you.

Preliminary Considerations

Before you can start shorting the best mutual funds to invest in, you should consider the following factors that have a significant bearing on your selection process:

Answer the ‘Why’ Question

To build a successful mutual fund portfolio, you need to first ask yourself the ‘why’ question. Why are you investing in mutual funds? The answer to this question will help you identify your goals and objectives. Remember that the returns you expect from your mutual fund investments can be to fund your children’s higher education or for a vacation abroad or during your retirement years. However, the specific goal you pick will determine which mutual funds are best for you.

Risk Appetite

Another factor to consider is your risk appetite. While more risky mutual fund investments may be able to fetch you higher returns, you may also incur significant losses if there are downward market swings. Thus, if you think you cannot weather highly volatile market conditions, a more conservative approach to mutual fund investments may be better suited for you. Therefore, since the mutual funds you pick will depend on your risk tolerance threshold, you must assess this parameter carefully before researching funds.

Determine your Favourable Investment Tenure

Simply put, you need to have a clear idea of the tenure you’re planning to invest for before picking mutual funds. For instance, funds with a 5-year lock-in period may be ideal for those planning on a long-term investment, while these same funds may not be the best fit for those concerned about short-term liquidity.  

These three factors combined play a key role in determining your investment approach. In other words, whether you pick a debt, liquid or equity mutual fund will depend completely on your goals, risk appetite and preferred investment tenure. For instance, for conservative investors with long-term goals (5 years or more), investing in large-cap funds may be prudent, while hybrid funds may be better suited for those who have a high risk appetite and are looking for short-term (up to 3 years) mutual fund investments.

Researching the Best Mutual Funds

Once you’ve outlined your goals, timeline and risk appetite, you can start researching the best mutual funds to invest in India. Here’s how you can start the process:

Assess the Performance of the Fund

Analysing a mutual fund’s performance over a considerable period will help you assess if it has churned out consistent returns for its investors. While the historical track record of a mutual fund is not always indicative of its future performance, reviewing this aspect helps you get an idea of its general performance over the years as well as the fund manager’s capabilities. A mutual fund that has consistently beat its benchmark by generating higher returns may be a reasonably prudent bet to consider.

Check for Investment Strategy Alignments 

Every fund house will have an investment strategy that’s spearheaded by its fund manager. This investment strategy guides where your money will be parked if you opt for the fund. If your investment strategy does not align with that of the funding house, adding the mutual fund investment to your portfolio may not be a good choice. For instance, you might prefer low-risk investments in debt funds as the best mutual funds to invest in for the long term. In such a scenario, opting for a fund house that specialises in equity funds may not be prudent.

Review Expense Ratios and Exit Fees

The fund house you pick will charge you a certain amount for managing your MF investments. This charge is inclusive of the fund manager’s fee and is termed as the expense ratio of the fund. This can take away a sizable part of your earnings. Thus, the best mutual funds to invest in are ones with low expense ratios.

To discourage investors from exiting mutual fund investments in the short-term period, funding houses also levy an exit fee. You should preferably look for options that come with zero or minimal exit charges when looking to invest in mutual funds online.

Risk Profile Assessments

Once you’ve figured out your own risk appetite, it’s time to research the risks associated with potential mutual fund investments. While buying a mutual fund inevitably carries risks, you can assess the risk profiles of funds to ensure that you don’t overstep your risk appetite.

Evaluate the Fund Manager’s Track Record

For actively managed funds, evaluating the track record of the manager can be as important as assessing the past records of the fund itself. Whether the fund performs well or poorly will depend on the research, analysis and expertise of its fund manager. Thus, it is always prudent to research the tenure and performance of the fund manager of a mutual fund before investing in it.

Conclusion

Mutual funds can help you kick-start your investment journey in the share market today. However, you do need to perform due diligence before investing in such funds to ensure that your hard-earned money doesn’t sizably depreciate over time. A thorough analysis can help you pick the best mutual fund investment options while weeding out the rest. Once you get a grip on this process, you can pick the right investment options and enjoy the hefty returns such funds have to offer. 

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