Top 10 Things to look for in a Mutual Fund before buying

Posted by

1. Type: Mutual funds are mainly two types. Equity Mutual funds that invest in share market. Debt Mutual funds that invest in Debt instruments (like Corporate and Govt. Bonds, Treasury Bills, Commercial Papers, Certificate of Deposits). Then there are funds with any combination of the above two called Hybrid or Balanced funds that invests partly in Share Market and partly in Debt Market. You first have to decide what type of Mutual fund you want to invest.

2. Sub-type: Equity MFs have sub-types like the Large cap, small cap, mid cap, Diversified etc. What this means is the fund manager will invest your money in Large companies, small companies, medium companies or all types of companies (Diversified). Debt MFs also have sub-types like Liquid funds, Gilt. Funds etc.

3. Asset Under Management: It represents how much money the fund manager is managing. The bigger the better. Bigger AUM represents the popularity of the scheme and authority of the fund house. Although, a bigger fund means the returns will be relatively low.

4. Fund House: It should be a reputed fund house having some track record and known, respectable promoters. Ex. Motilal Oswal, Parag Parikh

5. Returns compared to benchmark and peers: You could easily do this by visiting moneycontrol.com. They have a nice system of comparing returns of different schemes with peers as well as the benchmark. The more the better.

6. Time Period: How long a fund has been into existence. We should not be swayed away by higher returns. The main question should be “Are those returns consistent?” For example, I would prefer a MF scheme with 20% CAGR over last 7 years as compared to 25% over last 3 years. You should also see how the fund has performed during bad markets like 2003, 2008 ones.

7. Fund Manager: This would be difficult for a beginner to assess as they themselves are just starting out but they should look only one thing that the fund manager is managing the fund for a long time and that he has sufficient experience. It is not considered good for a MF scheme to change its fund manager frequently.

8. Expense Ratio: This is the cost that you pay fund house for managing your money. The lower the better. Go for Direct Schemes as they have less expense ratio than regular ones. Generally, it is around 2-2.5% for regular and 1-1.5% for Direct schemes.

9. Exit Load: This is the fine/penalty you pay to the fund house if you withdraw your money within specified time generally 1 year. It is usually 1% but could be higher. As you may guess, the lower the better.

10. Portfolio churn ratio: This means that how long the fund manager keeps a stock in the portfolio ones he/she buy it. Equity investments are best when held for a long term. So, the lesser this number the better. Also, if this number is higher it means the fund manager is paying a lot of taxes, brokerage and transaction charges which punishes the NAV.

These were the 10 things that I think one should look before investing into a MF scheme. Do let me know your thoughts on this. Also, tell me something else that you think one should look for in a MF scheme.

Cheers!

4 comments

  1. Could you tell why are investments in mutual funds being highlighted, advertized and publicized extensively nowadays in India, even though the concept has been existing since a long time….. Is it a deliberate attempt to draw the capital of the common public (which believes shares are risky) towards industrial growth without making them invest in shares, and help contribute towards the nation’s economy ? Won’t this cause further deterioration in the conditions of the already traumatized public sector banks ???

    1. Yes! You have answered it yourself. It is an attempt to encourage the public to participate in the growth of the nation.

      You see, Indians are conservative people and most of them do not understand the benefits of investing in equities. It is a win-win situation. The public gets a higher return on their money compared to other investment avenues and companies gets funds for growth and expansion which creates Jobs and which again, in turn, puts money into the pockets of people. This is how a nation and civilization prospers!

      This is the reason Govt. and corporates are educating people about mutual funds and equities and encouraging them to invest in the same.

Leave a Reply

Your email address will not be published. Required fields are marked *