Are you thinking about investing but not sure how to choose the mutual funds? Do not worry, you are not alone. Selecting a mutual fund is an important and a crucial step. This is a general question which many advisors face from people is how to choose a mutual fund? This question becomes important when an investor is planning for a long term mutual fund investment. Besides, it is wise to choose mutual funds with high value of assets under management. You might not be aware but the selection process is much easier once a few questions are clear in the mind of the investor.
Different Ways to Choose the Right Mutual Funds to Invest
Identifying Risk Tolerance
The most important step is to have an investment goal because selecting a mutual fund without an investment goal in mind is completely useless. An investor should know the reason for investment and the period one wants to put in before reallocating the investments. You should ask yourself if the investment is for long term goals or current income? Will the money be used for marriage and education or will it be used for retirement?
Besides investment plan, you should also understand your risk tolerance factor. Can you tolerate the high risk or would you prefer small loss? This will help to realize your portfolio plan as well.
Types of mutual funds
So, your focus will lead to correct asset allocation and one can select the mutual funds as per your financial plan. Although it is advised that an investor must have a diversified portfolio. If you are willing to take a large amount of risk then your style is suited for long-term capital appreciation fund. They also provide large reward over time. The balanced funds may be the best alternative for people who are willing to take low risk. Besides, the size of the funds does not affect the returns.
Charges and Costs of managing funds
Keep a note on the assets management charges. When buying mutual funds, it is important to gain an understanding of different types of fees. It is important to understand the different types of fees involved. All mutual funds in India are no load funds. This means there is no sales cost hence all the money gets invested. When investing in a large capital fund, it is a good idea to pick the funds yourself.
Evaluation manger's past results
Always look for an experienced team where the fund managers have handled a few accounts in the past. Look for well-managed funds of charges below 1.9% per annum. When you are buying a mutual fund if it says it is a large-cap fund, it should be large cap fund and not mid-cap fund. If it is your choice of having large cap fund, the fund manager should respect that. An important thing to note is never to chase performance. The mutual funds which managed to do well today might not fare well tomorrow.
The investor should always ask questions like did the fund manager provide results that were consistent with the returns? Or did the returns vary over a period of time? This will give you an insight about the fund manager and how he performs under certain conditions.
But the performance of the money manager in the past might not be repeated in the future. Hence, you should review the company's profile and performance before investing. Half the battle is won when you are clear about your objectives and risk tolerance. One final tip on how to choose mutual funds? The investors should keep a track of the management expense ratio. Selecting mutual funds can be a daunting task, but with the clarity, it should not make things difficult for you.