How to choose Right Mutual Fund Scheme

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How to choose Right Mutual Fund Scheeme

Choosing a scheme from thousands ofmutual fund schemes available in the market is not easy for many investors. Opting for the right mutual fund scheme is one of the biggest hurdles faced by many new investors. However, you would be fine if you are ready to follow some broad guidelines. 

What is your investment objective? 

"Why are you investing? This is the first question you should ask yourself and be sure to define your expectations in terms of time horizon, returns and risk," says Amar Pandit, Founder and CEO, My Financial Advisors, a Mumbai-based wealth management firm. Defining each of these parameters would help you choose the asset class you are going to invest. For example, if you have an investment horizon of five to seven years, you can invest in an equity scheme. If you have near to medium term goals, you would be better off in comparatively safer debt schemes. 

Is the fund house reliable? 

Yes, there are many mutual fund houses and a mindboggling number of schemes. But you can eliminate a number of them from your list by short-listing a few fund houses you would like to do business with. Does the fund house enjoy trust of the investor community? Who is the promoter of the AMC? Is the AMCbusiness a focus area for the promoter? Is the AMC known for its consistent performance? If the answers are positive, you can consider to handover your money to the fund house. 

Who is my fund manager? 

No, we are not asking you to chase star fund managers. We just want you to familiarise yourself with your fund manager, so that you would be able to track his views, investment strategy, etc. This becomes crucial especially during a bad patch - a trusted fund manager would be able to communicate to you properly and put you at ease. These days most fund houses have put in place a process to ensure that everyone stick to the broad guidelines. However, some fund managers still make a difference - it could be extra returns or effective communication to investors. Always look how he has managed the scheme of your choice over a medium to long period. If the fund manager has taken over the fund very recently, it would be a good idea to give him some time to prove his worth. 

How has the fund performed? 

It is time to get into specifics. Take a look on how the scheme has performed over a long period, preferably during different market cycles. Always look for consistency over outperformances during different phases in the market. You could take look at the performance of the fund scheme against its benchmark, peers, category average to get a rough idea how the scheme has fared over a long period. "Check whether the fund has performed well during different market cycles and whether it was able to push itself up after a downfall, if any", adds Amar Pandit. 

Are the key ratios in fund's favour? 

There are some key ratios that would further help you to eliminate some more schemes from your shortlist. Total Expense Ratio(TER) is one of the main ratios. It is simply a measure of the cost to the investor. It takes care of the fund manager's fee, administration and other operational expenses. Needless to say, lower expense ratios are better as more of your money is invested. You can also take a look at some other key ratios like Sharpe Ratio (tells you how much extra risk the scheme is taking to produce extra returns), standard deviation (tells you how volatile the scheme is) to finalise a scheme to invest. 

For any query feel free to call me (Gaurav Kansal) at 9313368533

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