Section 8 – How To Select A Suitable Mutual Fund Scheme For Investment

Table of Contents

How to select a suitable Mutual Fund Scheme for investment

A big variety of schemes are available in the mutual funds space. Every scheme has their own merits and limitations. There are many investment classes like Equity, Debt, Hybrid, Solution oriented etc. are available. Every asset class has different scheme categories and every scheme category has different schemes. It is important for every investor to select a suitable mutual fund scheme for investment. Selection of suitable scheme for investment is a step wise process –

Step 1 – Which asset class?

  • There are various asset classes like equity, debt, gold, real estate. First understand Investment objective, risk appetite, time horizon and financial status of the investor. Based on these factors which asset class is most appropriate for the investor should be decided. It is always good to distribute the investment between different asset classes.

Step 2 – Which scheme category?

  • There are various scheme categories with their own investment strategy and style. Different investors have different needs – some may want long term growth, some may want periodic income, some may be looking for an avenue to park funds with high liquidity.
  • An investor’s needs and risk-taking ability must be understood. Based on that, the scheme category most appropriate for the investor should be recommended.

Step 3 – Which scheme?

  • Select a particular scheme within the category based on performance and other parameters. Most of these parameters are available in the factsheet of that particular scheme.

Step 4 – Which option?

  • Select right option within the scheme e.g., growth, dividend re-invest, dividend pay-out.

This is a general methodology to select a suitable Mutual Fund Scheme for investment. Once the investor has chosen the asset class in which he will invest based on his need, he can select which scheme category is most relevant for him based on the risk he can take and his investment horizon. Example – An investor who wants low risk in equity funds will choose index funds, those who can take higher risk will choose growth fund.

The main factors which need to be considered for selecting a suitable scheme for investment are

  • Fund Performance

A fund’s performance should be compared with its benchmark and its peers. For equity, performance of at least 5 years should be checked and in the case of long-term debt performance of at least 3 years.

  • Fund Portfolio

To have a look on fund portfolio before investing is a good practice. In case of equity funds diversification across stocks and sectors, market segments in which the fund invests, portfolio management, churn in portfolio etc must be checked.

If investing in debt funds average maturity of portfolio, credit risk etc should be checked.

  • Fund Age & Fund Size

A fund that has existed longer is preferable to a new fund. An older fund will have a track record which can be studied.

Fund size is also important factor especially for equity investments. For example, large fund size is considered better for diversified large-cap equity but small size will be better for sector fund or mid-cap fund. 

  • Scheme Running Expenses

Investors must carefully consider the expense ratio of a scheme. It affects the profitability of the scheme.

  • Taxation and liquidity 

Taxation and liquidity are also important factors which must be considered while selecting a mutual fund scheme.

Apart from the above factors many other factors like economic scenario, Analysis and reports published/broadcasted by authentic research agencies and industry experts etc should also be considered in process to select the most appropriate scheme for investment.

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