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How to select the best mutual funds

If you’re thinking about investing in a mutual fund but can’t decide which one to begin with, you’re not the first person in this boat. When shortlisting mutual funds to invest in, you should have a sound knowledge of mutual funds themselves, and how they work. You should also know what is NAV, the different types of mutual funds there are and more. We’ve discussed these concepts previously, so if you haven’t checked them out yet, we highly recommend you do. In here we will discuss a step by step process of selecting the best mutual funds.

Key Points:

  • The first step to getting to your preferred mutual fund is to have a clear idea about your financial goals.
  • You must also be clear about the amount of risk you are willing to take.
  • Strong Asset Management Companies (AMCs) and are critical to the performance of the fund.

Mutual Funds Basics

Mutual funds are mainly managed by money managers with sufficient knowledge in order to efficiently invest your money. If you are invested in any mutual fund, you with your fellow investors will participate in the same fate of the fund. The money managers of a mutual fund invest in a wide number of securities, and its performance is tracked meticulously. This makes it both important, and easy to select your mutual fund when diving into this market. There are plenty of ways you can go about doing this.

Things to keep in mind when selecting mutual funds

  1. Identifying goals and time frame: The first step to getting to your preferred mutual fund is to have a clear idea about your financial goals You should be clear about the type of return you want - such as long term capital gain or short-term income. Is the mutual fund money to be used for current expenses - like to buy a car or for long-term retirement planning? Will the money be used for children’s study purposes or be used for your daughter’s marriage? These questions must be cleared in your mind before finding the best mutual fund.
  2. Risk tolerance: You must also be clear about the amount of risk you are willing to take. Sometimes your funds can encounter a dramatic shift. Will you be able to handle the situation? Will you able to stay calm and handle the situation with proper understanding? Otherwise, you can go for a conservative mutual fund - perhaps a debt fund - which is less risky but, the returns will be less compared to other more risky mutual funds. Keep in mind that no mutual fund is risk-proof. The stock market is a dynamic and unpredictable animal--as many experienced traders and investors would be willing to tell you.Fund type: The fund type you would want to go for should be based on the goals we just talked about. These goals are:

    • Long term goals: If you have long term goals, you should choose an equity-oriented balanced scheme or blue chip funds. This assures you solid returns for a long period of time.
    • Investment period of 5 Years: If you want to stay invested in mutual funds for a period of 5 years or more, you should choose a mid-cap or large-cap fund. These are diversified equity schemes.
    • High-risk: If you want a high return and are up for some risk, you can go for small-cap funds or sectoral schemes (If you are confident about the growth of the sector in near future).
  3. Charge and fees: Mutual funds make their money by charging you fees when you invest in these funds. So, you must have the knowledge of the charges that are levied.
  4. Evaluating fund managers: After you have prepared a preliminary list of mutual funds you want to invest in, it is time to evaluate these funds. An important aspect that you should keep in mind before investing in a mutual fund is to evaluate the managers or asset management companies(AMCs) who are managing the funds. Good managers are critical to the performance of the fund. They manage these funds by improving the portfolio, by eliminating low-performing stocks and adding stocks which have a better chance of performing in the future. Fund managers keep an eye on the portfolio and re-assess these stocks regularly for a better result.
  5. Past records: Before choosing the best mutual fund in the market, you should always look into its past performances and ask questions such as:
    - How did it fare in the bear market and bull market?
    - How much return did it offer in a certain period of time?
    - Dividends offered, long-term growth record, etc.

However, past performance cannot be considered to be an indicator of future performance of mutual funds. But it can point towards the soundness of a particular fund’s comprising assets.

Wrapping Up:

  • It is super important to have clarity on what you’re looking for when selecting your mutual fund.
  • All evaluations do not guarantee you a shot at success on the funds you choose. But they definitely enhance the chance of improving the performance of your fund.
  • Never forget to keep a track of the funds you are invested in. It is very important for you to check the performance of the fund regularly.
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