Different investors have different ways to select the mutual funds that are right for them as per their investment goals and risk profiles along with other financial factors. You need to know what your investment goals and objectives are as well as your risk profile before you go on to select the mutual fund for yourself. The market is filled with different fund houses floating out new mutual funds now and then through the year. It can be difficult at times to understand which one is right for you. It is when the need to do technical analysis of the mutual fund is required, including checking the performance of the fund house and the mutual fund scheme in the past, its expense ratio and the management team of the fund. Here are the few tips to help you the winning mutual fund –
Expense Ratio
It costs money to run the funds, and the funds house needs to pay for it from the assets before it can start investing and generating returns. The expense ratio includes overhead expenses, management fees, service fees, advisory fees, and so on. Just about anything that the fund spends that doesn’t go into investing, it becomes part of the expense ratio. If the expense ratio of the fund is too high, it is essential to stay away from it. Consider investing in reputable and consistent mutual funds with low expense ratio for best results.
Active Vs. Passively Managed Funds
Mutual funds can be classified into actively or passively managed funds depending on their turnover ratio. The actively managed mutual funds are those in which the funds are reallocated often, and the fund managers are trying hard to beat the benchmark indices. The fund managers are actively involved in market research to generate higher returns for investors. These are mostly high-return high-risk funds, and its expense ratio is also higher.
Passively managed funds often tend to duplicate and follow the benchmark index and have thousands of holdings, which mean it is comprehensively diversified. It may or may not offer high returns but definitely adds stability to the mutual fund portfolio. The expense ratio is also lower than the actively managed funds. You can choose from these two funds depending on your investment objective or can choose to invest in both for optimal growth.
Past Performance and Management Team
Checking the performance of the mutual fund in the past as well as checking the activities and track record of other fund schemes managed by the fund house will give you a good idea on whether the fund is right for you or not. It is one of the key components when answering how to select mutual funds. You need to make sure that the mutual fund delivered consistently since its inception and wasn’t too volatile. You also need to check the turnover ratio of the mutual fund to get an idea of its tax liabilities. The historical trends and the above-mentioned factors will help you decide if the mutual fund is right for you or not.
Aligns with Your Philosophy
Different people have different ways of managing their money. Some believe in ‘value investing’ that is they purchase mutual funds of a few businesses that are at a low price but are expected to give excellent results. Others can follow the ‘growth investing’ rule where they pick mutual funds of the fastest-growing companies irrespective of the cost. To be a successful investor, you need to pick companies or a group of them that aligns with your investment philosophy so that you are comfortable.
Concentrate on Good Diversification
It is not enough to purchase mutual funds of four different companies in the financial industry and consider it to be a diversification of assets. It is crucial that you build a portfolio using mutual fund from different companies and not just the same mutual fund family. It is also best if you avoided funds of sectors that usually run on industry bets.
There are many different ways for you to select mutual funds. What works for you might not work for someone else. Thus, it is best to keep your financial goal in mind when deciding which mutual funds are best for you.