7 Points beginners should keep in mind while choosing Mutual Funds
Mutual funds: A mutual fund is a type of investment instrument which consist a pool of Assets of stocks, bonds, or other securities. It reduces the risk of volatility of Stock Market and considered as the peaceful investment. It is one of the best choices for those who are working and have little or no time to trace their investments every day. Historically, for long term investors, in worst case it has given a return of 10% CAGR and in best case it has even reached to 25% CAGR successfully beating inflation and also generating good wealth for investors.
7 Points to be consider while choosing Mutual Funds:
- Overall long term returns: Since the Mutual funds are for long term, an investor should always consider long term returns. The returns should be considered for at least 3 years. If a Mutual fund is new, a long term investor should avoid it and wait for at least 3 years.
- Consistency in rolling returns: Rolling returns are returns in a particular span in which a Mutual Fund has performed in different intervals. If you consider 3 years returns then you should consider every 3 years span returns since the inception of the fund. For example, if fund is started in 2010, look at every 3 years span returns as in 2010-13, 2011-14, 2012-15 and so on till the latest date. If you find the consistency in returns (let say around 15%), you should consider that Mutual fund for investment.
- Diversification: This is important point before investing in Mutual fund; an investor should look for diversification in sectors. If a fund is too concentrated in one or two sectors it will increase the risk of negative returns if something wrong happen to that sectors. A good diversification reduces the risk and increase chances of good and steady returns. A fund should be diversified in different sectors like Banking, IT, Pharma, Telecom, Auto and so on.
- Risk to reward: This is a well know phenomenon not only in Mutual Funds but everywhere in life. If a fund is claiming high returns then fund is prone to high risk and Vice versa. If an investor wants to keep his money safe and want to build wealth slowly but steadily then he should consider the funds which are Moderate to High risk.
- AMC track record: A good AMC record and good fund manage profile increases the chances of that fund to outperform. As if AMC and its fund manager has good track record, more people will buy fund from them and they can manage it in better way. Always check AMC and its fund manager track record from different sources before investing.
- Expense ratio: Expense ratio is the cost on investors which AMC takes for managing their funds. More expense ratio lessens the absolute return in long run significantly. If a fund looks good but its expense ratio is abruptly high any you will able to enjoy good returns as it will get cut down due to high expense ratio. An expense ratio which is anything less than 1% is good to go.
- Entry, Exit load and Taxes: Always check the Entry and exit load; it should not be too high. Also check the taxes on the returns for long term; it should not have many taxes that an investor not understands.