Mutual funds investment in FY25: Key factors to consider before picking MF schemes

A new financial year is always a good time to kick-start new investments. Not only does it provide the opportunity to fix the gaps in your financial portfolio that would have caught your attention during the year-end review, but investing at the start of the new year also helps you devise a comprehensive financial plan for the full year.

Stepping into FY25, most of you must currently be in the process of working out your investment strategy for the current financial year. And many of you may have already realised that devising an effective plan without considering mutual funds is nearly impossible.

Mutual funds hold the potential to instantly diversify your portfolio by investing across stocks, bonds, government securities, or even gold and other assets. With hundreds of mutual fund schemes available in the market, every investor can find that one product that meets his/her requirement.

In case you are trying to find a mutual fund scheme that fits in your investment plan, here are some of the key factors you should consider before taking a decision.

Investment objective

Before shortlisting mutual fund schemes, define your investment objective, time horizon and risk tolerance to find a product that aligns with your objectives. Your investment objective can be to seek capital growth, generate regular income, or just to preserve capital. Once you are clear on your parameters, assess what a particular mutual fund scheme is trying to accomplish for its investors by reading its offer document. Shortlist a scheme if its objectives align with your investment goals.

Consistency in performance

The biggest mistake an investor can do while choosing a mutual fund scheme is shortlisting a product based on previous year’s returns. Instead of looking at just one year, you should analyse the scheme’s historical performance across different time periods. You can also compare the returns of the scheme with relevant benchmarks or peer funds. This will bring forth the consistency factor in the performance of a scheme and can help you make the correct decision.

Expense ratio

Expense ratio is the fee that asset management companies (AMCs) charge from investors for managing the mutual fund scheme. The ratio represents the annual operating expenses of a scheme expressed as a percentage of the fund’s daily net assets. These expenses can include administration, management, distribution, and advertising and marketing-related expenses.

For example, an expense ratio of 2% would mean that a fund house is using 2% of its total assets under management (AUM) to cover annual expenses related to the mutual fund scheme. In India, the market regulator has capped expense ratios in the range of 0.05% to 2.25%, depending on the type and the AUM of the fund.

For instance, for equity funds, the maximum expense ratio can go till 2.25% if the AUM of the fund is up to ₹500 crore. If the AUM is between ₹501 crore and ₹750 crore, then the expense ratio is capped at 2%.

Lock-in period

The lock-in period in mutual funds refer to the period when you are restricted from redeeming the units of the fund, either partially or wholly.

Most open-ended mutual fund schemes – which are always open to investments and redemptions -- do not have a lock-in period in India. But there is one exception in this category, which is the Equity-Linked Savings Scheme, or ELSS.

ELSS plans are tax-saving mutual funds that come with a lock-in period of minimum 3 years. This means that investors can redeem the units only after 3 years from the date of initial investment.

All close-ended mutual funds also have a lock-in period. In a close-ended mutual fund, a fixed number of units are issued which can be purchased only during the NFO (new fund offer) period. These units can then be traded in the open market like shares. But they can only be redeemed after the maturity of the fund which is typically between 3 and 7 years.

Entry and Exit load

Entry and exit load refers to the fee charged by fund houses from investors when starting or exiting a scheme. They are also represented as a fraction of NAV (net asset value). Since charges are added costs and eat into your investment amount, always look for mutual fund schemes that have zero to minimal entry and exit loads.

Fund manager

The expertise and knowledge of a fund manager plays a key role in determining the success of a mutual fund scheme. The marketing campaigns for many mutual funds in India are dominated by star fund managers. A smart investor should never blindly trust such campaigns. Rather, they should evaluate the performance of all current and previous mutual fund schemes managed by the fund manager to check his/her past track record during different market cycles. Only once the credibility and consistency of a fund manager is established, one can consider investing in the selected scheme.

Before you go

Investors should choose a mutual fund scheme for themselves only after doing basic research on the investment objective of the fund, the track record of the fund manager, the historical performance of the scheme compared with its peers and the different types of costs associated with investing in the scheme.