Mutual funds have emerged as a popular investment option, offering a balanced approach to growing wealth without the complexity of managing individual stocks.
Wouldn’t it be nice if there was a simple way to grow your money while you sleep?
In today’s world, everyone is looking for ways to invest and grow their savings. Some are diving into stocks, while others are exploring cryptocurrencies. But for many, mutual funds have emerged as a popular investment option, offering a balanced approach to growing wealth without the complexity of managing individual stocks.
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If you’re thinking about mutual funds, you might be wondering—how you choose the right one? With so many options available, making the right choice can feel a bit like picking a meal from a menu—one wrong move, and you could end up with something that doesn’t suit your taste.
Mutual funds can be a smart way to maximise returns, but knowing how to select the right one is key to building a strong portfolio. Whether you’re a first-time investor or someone looking to diversify, here are some simple things to keep in mind before you decide.
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Key factors to consider when choosing mutual funds
Long-term performance – The first thing to check is the fund’s performance over a long period. A fund might show impressive short-term gains, but how has it fared during different market cycles?
Look at the returns over the past five to seven years, not just the most recent data. This will give you a clearer picture of the fund’s consistency and help you avoid being misled by short-term spikes.
“For prospective investors to decide which mutual fund is best to invest in, there are certain important aspects that should be focused on, while selecting the fund. Primary focus must be on the performance of the fund over a longer tenure. This helps them see the consistency of the fund in various market cycles and not just recent performances which can be misleading over a period of time,” said Swati Saxena, Founder and CEO, 4Thoughts Finance.
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Compare with peers – It’s not just about how the fund is performing on its own; it’s also important to compare it with others in the same category.
For example, if you’re looking at large-cap funds, compare it with other large-cap funds to see how it stands over time. A good fund will show consistent results compared to its competitors.
Stability of the fund management team – The people managing the fund can significantly impact its performance. If the team changes frequently, the fund’s management style could change as well.
So, look for a stable management team that has a proven track record of delivering results. A fund’s success often hinges on the people behind it.
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“Of late, there have been many fund houses where the entire team gets changed and consequently, the style of the fund and the way it’s being managed changes with the transformation in the team,” said Saxena.
Assess underperformance – Sometimes, funds underperform due to specific investment decisions or market conditions. Before dismissing a fund that has had a poor quarter or year, try to understand why it underperformed.
Was it a temporary setback, or does it signal deeper issues? Understanding the reason behind a fund’s performance can help you make a more informed choice.
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Swati Saxena said that depending on the call, which is basically what kind of stocks they are investing, one should at least have a look at these aspects before completely negating a fund or selecting a fund.
Assets under management (AUM) – Another factor to consider is the size of the fund, measured by its Assets Under Management (AUM).
Larger funds tend to be more stable and have better liquidity. In times of market volatility, having a fund with higher AUM ensures that you can withdraw your investment more easily without affecting the fund’s stability.
Risk and reward ratios – Every investment comes with risks, and mutual funds are no different. Check the Beta and Sharpe ratios of the fund.
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The Beta ratio tells you how much the fund’s performance is affected by market movements, while the Sharpe ratio helps you understand whether the returns justify the risks taken. A fund with a higher Sharpe ratio and lower Beta usually means it’s delivering good returns without taking excessive risks.
Financial goals – Before choosing a mutual fund, it’s essential to understand your financial goals. Are you saving for retirement, buying a house, or planning a child’s education? Different goals will require different types of funds.
Diversification – Don’t put all your eggs in one basket. Diversifying your portfolio by investing in a mix of long-term funds, equity funds, and liquid funds can help manage risks while maximising returns. This ensures that you have a balanced investment strategy that aligns with your risk tolerance.
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Top mutual funds to invest in
Here are some top mutual funds to consider, as recommended by Swati Saxena:
Large Cap Funds
- ICICI Pru Bluechip Fund
- Nippon India Large Cap Fund
Mid Cap Funds
- Edelweiss Mid Cap Fund
- Nippon India Growth Fund
Multi/Diversified Funds
- Kotak Equity Opportunities Fund
Why discipline matters in mutual fund investing
Vinod Singh, Co-founder and CEO of FINHAAT, mentions the importance of being disciplined when it comes to investing.
“Saving regularly and keeping things simple can help you achieve financial security. SIPs (Systematic Investment Plans) are a great way to automate your savings and take advantage of compounding over the long term,” he added.
He adds that many people feel discouraged by how little they can save each month. But, as Singh says, “Don’t worry about the amount. Start where you are, use what you have, and do what you can.”
