We all want to have the best in our lives, right from the best school for our kids, to the best car to drive, the best home to live in, and even the best mutual funds to invest in. Mutual funds have now become a popular investment option for novice as well as seasoned investors. Having said that, to meet your investment goals, it is crucial to pick up the right mutual funds. With around 40 mutual fund houses together offering more than 2,500 mutual fund schemes, it can be a daunting task to select the right mutual funds that align with your investment goals.
Many new investors rely on their friends and colleagues to get the names of the c. Some even take a chance and trust the recommendations of the social media and YouTube influencers or ready-made lists available on the internet to invest in the best mutual funds. However, what proves right for your colleague might not even be good for you because different individuals have different investment objectives, goals, styles, risk appetites, financial conditions, etc.
If you are looking to zero in with the best mutual funds to invest here are certain things you should consider while assessing the mutual funds to invest right now.
- Investment Objective:
If you are looking for suitable mutual funds to invest in your money, you should have a specific goal or objective in your mind. You should know the purpose of the investment, how long you are going to stay invested, and what kind of returns you would expect. Without a well-defined goal, even small fluctuations in your portfolio value might make you want to exit the investment.
Depending upon your investment goal, investment horizon, expected returns, and risk appetite, you can choose the right mutual fund schemes from the suitable mutual fund categories, such as equity mutual funds, debt mutual funds, hybrid mutual funds, etc.
The investment objective of the fund should be in line with your investment objectives. Moreover, while setting a return expectation, you should also understand your risk appetite. As you might already know, equity mutual funds are subject to higher market volatility but have the potential to generate substantially higher returns than other types of mutual funds.
- Investment Philosophy and Processes:
Many a time, investors ignore this important aspect when choosing mutual funds for investments. However, the investment philosophy, process, and style followed by the fund house play a crucial role in the performance of the schemes you hold in your portfolio. Every fund house has an investment strategy that leads their investment decisions. If the fund’s investment strategy does not match your investment approach, there could be conflicts in the long run, which will ultimately disappoint you and make you exit the investment.
- Portfolio Quality and Characteristics:
The performance of any mutual fund scheme largely depends upon its underlying portfolio, which is a mix of stocks and other securities. If the underlying portfolio is managed well and the securities appreciate in value, your mutual fund scheme is likely to generate good returns. Therefore, before choosing a diversified mutual fund scheme, you should make sure that the fund manager has spread the corpus across stocks from different sectors to make it a diversified portfolio and maintains a reasonable churning i.e. lower portfolio turnover ratio by not buying and selling the stocks unnecessarily.
- Past Performance Track Record:
‘Past performance is no indicator of future returns’, you might have seen this disclaimer given by fund houses several times. But, if you consider the past performance over a longer time period, it shows that the fund has gone through multiple market cycles, which impacts its performance. Check whether the funds are managed well to ride the market volatility smoothly through multiple market cycles while reviewing long term returns.
However, while comparing the performance of different mutual funds, it is necessary to do the comparison with the funds from the same category. The returns of the fund should be compared with the returns of the relevant benchmark across market cycles and over various time periods like 1 year, 2 years, 3 years, 5 years, and so on.
- Risk Reward Ratios:
There are various risk-reward ratios like Standard Deviation, Sharpe Ratio, Sortino Ratio, and Treynor Ratio that can be used to judge the fund’s consistency and ability to generate returns at reasonable risk for investors. The Sharpe, Sortino, and Treynor ratios help you understand the risk-adjusted returns generated by the mutual fund schemes. The higher the Sharpe and Sortino ratio, the better it is. The Standard Deviation measures the volatility of the fund, and so it should be lower. A ratio like Jensons Alpha helps understand the extent to which the fund generates market-beating returns. There are various other ratios, too, like up/down capture ratio, information ratio, etc., which can be used to compare and pick the best fund.
- Asset under Management:
The Asset Under Management (AUM) of a mutual fund scheme is the composite market value of its underlying assets. In simple words, it indicates the total size of the fund. However, you should know that a high AUM does not mean the fund guarantees higher returns. In the case of the small-cap equity mutual funds, a high AUM can make it challenging for the fund manager to manage the portfolio as entering and exiting the less liquid small-sized companies will become difficult. On the contrary, high AUM can be favourable to liquid and debt funds as the fund becomes less vulnerable to redemption pressure from a chunk of investors.
- Expense Ratio:
The expense ratio is basically the fund running fee that is charged to the investors by the fund houses for expertly managing their investments. The expense ratio is deducted from the NAV of the fund; hence it makes sense to choose the mutual funds that have lower expense ratios. Although the percentage of expense fee seems negligible, it makes a considerable difference in your entire investment value when calculated in the long run.
Consider these 7 things while choosing the best mutual funds to invest . Ready-made lists like top mutual funds to invest today, etc. might not be right for everyone as every individual has a different investment approach and investment goals. Hence, it is important to build own portfolio by analysing the points discussed in the article to ensure portfolio goals are in line with personal goals. However, if this analysis is too technical or one can not spend their time analysing these parameters, better consult expert professionals who will do all the analysis and help create a diversified portfolio.
Disclaimer: The views expressed here in this Article / Video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The Article / Video has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of the Article / Video should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. None of the Quantum Advisors, Quantum AMC, Quantum Trustee or Quantum Mutual Fund, their Affiliates or Representative shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary losses or damages including lost profits arising in any way on account of any action taken basis the data / information / views provided in the Article / video.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.