Today, an investor is bombarded with a wide variety of mutual funds investment plans that is offered their way. This might result in them feeling overwhelmed and choosing an investment plan that does not serve their purpose. An investor must always ensure that the objective of the fund is aligned with the risk profile, investment horizon, and financial goals of an investor. In this article, we will focus on some tips that can help you choose the right plan for your investment portfolio.
Criteria to select mutual fund schemes
Following are a few selection criteria that can be considered by an investor while making mutual fund selection:
1. Expense ratio
Total expense ratio (TER) or expense ratio refers to the commission or fees charged by the fund house or an AMC (asset management company). Expense ratio are the fees charged for managing a fund or the annual operating expenses associates with a mutual fund scheme. The expenses included in the expense ratio of a scheme consist legal fees, administration cost, marketing and advertising fees, managing cost, transaction cost, etc. As expense ratio has the potential to lower the net returns earned by an investor, it is advised to look for mutual fund schemes that enjoy a lower expense ratio against their peer funds.
2. Rating agencies
The past performance of a scheme might not be enough to compare mutual funds and determine the best mutual fund scheme for your portfolio. A new investor might get lost and confused by a wide variety of mutual fund investment plans offered to investors in India. What makes the matters worse is the similarity among these schemes. As an investor, you can choose to invest in funds basis the fund ratings derived by several credit rating agencies such as CRISIL, value research, etc. These agencies can prove to be useful to an investor due to the valuable information they offer to investors.
3. Fund size
Fund portfolio size is a good indicator of the potentiality of the fund. The flagship mutual fund schemes with a decent AUM (asset under management) are usually managed by the some of the best and experienced fund managers. A larger size of the portfolio signifies a more dependable mutual fund scheme.
4. Average returns offered by the mutual fund category
If you wish to indulge in mutual fund comparison and understand the performance of the scheme, then you may compare their performance against peer funds or underlying benchmark. You might also consider looking at the average returns offered by the mutual fund category. When looking at the average returns, there are four parameters to keep in mind. There’s not much difference if the scheme is rated first or third. What matters more is the consistency offered by the scheme on a rolling-return basis. Though it might be a good idea to look at the average returns of a category, you must only do it over a prolonged period of time.
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