A lot of discussions are taking place about the Mutual funds and the benefits of staying long term invested in mutual funds to take advantage of power of compounding. But not many people know, how to choose a mutual fund and how to monitor it and get favourable returns.

Well, a lot of investors have the same problem. Generally people by looking at others making mutual fund investments just jump into the waters by putting their investment in mutual funds without knowing much about the product and its selection process. Lets discuss and solve all these questions on how to select a mutual fund

Question # 1

What is the process to choose a mutual fund?

Sol: Choosing a mutual fund needs a lot of questions to be answered before investing in it. Your investment objective, risk appetite and time horizon.

Objective: Are you investing for saving tax (ELSS) or for getting monthly incomes (MIP) or for creating wealth in a long run (equity funds and balanced funds)

Risk Appetite: Are you ready to lose some percentage of your investments. Generally risk averse investors should invest their money in capital protection funds like money market funds or bond funds. But if you can take some risks, you may look to invest in equity funds. Credit Rating agencies like CRISIL can help you to analyze risk associated with the mutual funds

Question # 2

Should I look at the past performance only to select equity mutual funds

Sol: Past Performance is one of the important factor to choose a mutual fund, but not the only one. Just to take an example, Reliance Growth fund had performed consistently well from 1995 to 2006, but failed to perform after that. Instead, fund manager’s creditability and his experience matters a lot as he is the one who has to take investment decisions. Select a fund or a fund house which doesn’t have much history of changing fund managers. Also look to check the consistency of returns delivered by mutual fund over a significant period, that may be 5 years because a fund may outperform Sensex by 8% in one year and may underperform the benchmark in the next year. To check consistency, you may compare top five funds in your category to take a decision. Another point to notice is the sector and stock diversification in a mutual fund portfolio. Generally diversified portfolios perform better than concentrated portfolios in a long run.

Question #3

What should be my timeframe of investment?

One should have a investment horizon of more than 5 years, infact much more than that. Any investment made for a period less than 3 years is not a investment, but a trade and trading is prone to losses.

Conclusion

Finally, one must analyze his needs, his goals and time period to invest before investing in mutual funds. Look for past performance, experience and performance of fund maanger and portfolio diversification to select a mutual fund. Diversify your investments in large cap, mid cap and balanced funds. You may do all this research on moneycontrol and valueresearch. Another point to note is selection of mutual funds is important, but monitoring your investment at regular intervals of 6-8 months is equally important. One should have atleast 4-5 funds in his/her portfolio to diversify his investments and look to invest for your retirement needs and child’s future. To give you an example, investment of 2 Lakhs in mutual funds can grow to 10.46 Lakhs in 10 years, 54 Lakhs in 20 years and 1.25 Crores in 25 years which is a healthy corpus for your retirement needs assuming 18% rate of return which Sensex and equity funds have delivered in last 10, 20 & 25 years.

Categories: Features, Income Tax Saving Tips, Tax Saving Mutual Funds
Tags: Mutual Fund India