Best Mutual Fund: 5 Tips on How to Choose Right Scheme

Here are 5 easy steps on how to choose the right fund.

Twenty years ago if you had started investing Rs 10,000 every month in any of the top large-cap mutual funds then your portfolio would have grown into more than Rs 1.5 crore today at an assumed rate of 15 per cent. Just by staying invested and doing nothing you would have become a crorepati and could have retired by now. Though it sounds easy to invest in a mutual fund, it is not so easy when it comes to selecting a mutual fund. If you want to invest in the stock market through mutual funds, here are 5 easy steps on how to choose the right fund.

1) Financial Goal

You need to ask yourself why do you want to save. It is important to ask these questions because time period to achieve these goals may vary from months to years. For example, saving for down payment of your car is a short-term goal. While saving for your retirement or child’s education are long-term goals. By identifying your goal you would be able to stick to your investments and not leave it midway if come across other short-term goals.

2) Risk-taking capacity

Once you know your goals you need to link them with your risk appetite. If you are ready to take higher risks you can invest in mid-cap and small-cap funds. If you are a beginner then you can look at large-cap funds, considering they are less risky. You need to ask yourself whether you are comfortable investing in equities. If not you can go with debt and balanced schemes of the mutual fund.

Choose the MF category

After identifying financial goals and risk appetite, you need to zero down on the category of mutual fund which suits your requirement. For example:

• For long-term goals which are at least five years away, it is advisable to invest in equity funds
• For short term which are around 3 years away go for debt or balanced funds
• For immediate goals, which are within one year, invest in liquid funds
• For tax saving purpose invest in Equity-Linked Saving Plans (ELSS). These plans come with a lock-in period of three years and are good to achieve long-term goals

4) Performance of the fund

Once you know the category, choose the particular scheme you want to put your money in. Look at the performance of the fund during different tenures and compare it with the benchmark and similar funds in the same category. There are many mutual fund websites that offer you the comparison of schemes.

5) Fund manager’s performance

Last but not the least, take into consideration the track record of the fund house and fund manager before investing your hard earned money in mutual funds. There are some fund houses that have performed well consistently while few have performed exceedingly well only for a short span of time. Choose your scheme after looking at the long-term performance of the fund, and not just by comparing it for a year or so.