6 Parameters to be Considered while Selecting Best Mutual Funds

One of the most popular options for investment, a mutual fund allows an investor to accumulate wealth over a while through a systematic investment plan (SIP). It removes the hassle to buy and sell shares of companies as the Fund Manager does it for you, reducing individual transaction costs and only paying a small Expense Ratio for the fund.

Apart from building capital, mutual funds offer the benefit of portfolio diversity and the allocation of assets. For e.g. in an equity-based MF, the majority of the funds will be allocated to equities of different companies(large-cap, mid-cap or small-cap depending on the type), and some part of it to bonds and other money market instruments.

 ‘Mutual funds are subject to market risk’. We have heard this line too many times at the end of every advertisement for a mutual fund on radio or TV. So is it the only factor to be considered when selecting the best mutual fund for investment? There are personal reasons and market performance factors to be considered.  You can check out a list of the best funds by Scripbox for more information. We, at Scripbox, have collated six major pointers one should keep in mind when choosing the best mutual fund for best returns: 

Personal Reasons 

Investment Objective and Tenure

Every individual has a different financial goal depending on his age, income, wealth, status and a variety of other factors. You can have both long term and short term investment goals, which require different modes of investment. People usually invest in the long term for a child’s education, marriage, buying a house, retirement, etc. and in short term savings for a vacation, buying a gadget and other things. There are also some mutual funds offering the benefit of tax saving under section 80C of the Income Tax Act.

According to investment tenure, these following type of mutual funds may be chosen: 

 Tolerance to Risks

Mutual funds can be impacted by various economic conditions and risks. The Scheme Information Document(SID) gives investors a detailed description of what the risks associated with the fund scheme are. The risk level, of course, varies from one fund to another as some sectors and industries have more market risks. Macro and microeconomic conditions affect the fund performance a lot, as you would have seen in the Corona-hit market scenario. In addition to these market risks, the gains earned by a mutual fund may attract entry and exit loads, as applicable. An investor must hence read the Scheme Information Document carefully before investing in a mutual fund.

Generally, however, these funds can be categorized according to risk types: 

 Market and Fund Performance

 Fund’s Asset Under Management(AUM)

The total market value of the investments managed by the fund manager is called the AUM of the fund. In simple terms, it means the number and amount of subscriptions that the scheme has received. The higher the AUM, the higher the fund exposure, which in turn increases the risk overall. It can lead to higher gains as well. Large Cap Equity Funds usually have higher AUM. It is also a sign that investors are pouring in money in that fund. Top three AMCs(Asset Management Company) with the best mutual funds having the highest AUMs are respectively SBI mutual funds(Rs. 3.82 Lakh Cr +), HDFC mutual funds and Axis mutual funds. 

Fund’s Performace Against Benchmarks

The performance of a Mutual Fund can be measured against a standard, which is called the benchmark. It has been mandatory by SEBI(Securities and Exchange Board of India) for the mutual fund houses to declare a benchmark index. This benchmark index is usually the SENSEX or NIFTY for large-cap funds. S&P BSE 200, CNX Midcap are other indexes. When a mutual fund delivers more returns than the benchmark, then it is said to have out-performed the benchmark by so and so margin. So, if a fund gives returns at par with the benchmark, then the fund is said to perform poorly as it has given returns similar to an index fund, which is passively managed. 

Expertise of the Fund Manager and the AMC

It is ultimately up to the Fund Manager to deliver profits or losses, depending on the choices that the person will make. One should look at the fund manager’s previous experience and the returns and performances of the funds he/she had handled in the past.

AMC or the fund house is the company that handles and manages the different mutual fund schemes. For e.g. AXIS Mutual Fund AMC manages Axis Bluechip fund, Axis midcap fund, and different other schemes. As in the case of a fund manager, it is also important to check the track record of the AMC in question. 

The Economic Outlook

Some funds will perform better than others in different economic situations. A market crisis or a sharp turn in the economy will affect some funds more than others. Investments in SIP format hence is favorable in all situations, as it averages out the fluctuations in the market. Thematic funds are more affected. Like in the Coronavirus hit economy, the performance of Pharmaceutical based Funds are good, while others falter. Debt funds are more likely to stay secure in such cases. 

All in all, a little research before investing will help you out to choose the best mutual fund for your needs.