Wealth Guide: 5 factors to consider while picking a mutual fund, decodes Akshat Garg of Investica

India’s financial market seems promising for the next couple of decades, Moreover, financial literacy is spreading like a wildfire as we can see the government is also running many campaigns.

Social media is filled with influencers leveraging the importance of investing.

Increased retail participation exhibits the disappointments with the traditional assets like F.D which might not even beat inflation with such low yields.

Hence, the fundamental cause of the shift is happening where investors are moving their money to financial markets to earn that extra return with the due risk

Mutual funds as an asset class have been preferred because of the simplicity of their structure and also professional active management that can save those investors who might burn their hands in direct equities due to lack of time, knowledge and skills to invest

India’s Mutual fund industry has witnessed a 6-fold phenomenal growth in the last 10 years in the terms of total AUM.

This growth is expected to be more aggressive in the coming years and hence with this growth investors is offered more than 2500 mutual fund schemes to invest in, yes! You read it right!

Akshat Garg, Manager-Research at Investica – an online platform for investing in mutual funds highlights 5 factors that are imperative to consider while choosing an equity mutual fund:

Investment Horizon:

Before investing in equities, defining your goal and the time horizon needed to achieve the same is critical. Equity as an asset class is exposed to the higher volatility (risk) which is why the return expectations are high compared to debt where the volatility is less relatively

One should strictly avoid investing in Mid-caps and small-caps funds when the investment goal is within 3 years as they are highly volatile in the short term and slight correction in these may not let the investor achieve his desired goals

Contrary, Mid-caps can be part of one’s portfolio when the investment goal is at least 4 years away, as the return expectations are higher compared to large-cap funds

Expense Ratio

Whenever an AMC runs a mutual fund scheme, it incurs expenses like fund administration cost, IT infrastructure set-up, fund managers salaries, etc.

All these costs are ultimately born by investors of the schemes in the form of “Total expense ratio” TER. A higher expense ratio can affect a fund’s profitability negatively.

An ideal expense ratio lies below 1.8-2%, hence investors should avoid all those schemes where the expense ratio is more than 2%.

Performance against Benchmark in the Long term

While evaluating a mutual fund, it is very crucial to track the performance of the fund against the benchmark of that fund

If a mutual fund scheme is not able to beat the benchmark in the long term (3, 5, 7 years), one must avoid such schemes and invest in those schemes which are beating the benchmark and generating alpha consistently

Fund Manager’s experience

A fund manager is a professional who manages the money of the mutual fund scheme on the behalf of the investor.

He is responsible to frame investment strategies and taking bets like sector calls, exit routes and also need to manage adequate liquidity in the fund to meet the redemptions

Investors must prefer those funds where the fund manager has experience of at least 5-7 years, so in times of turbulence in the market he may ride the volatility well and generate superior returns in the long term

Sharpe Ratio

Sharpe ratio is used to evaluate the risk-adjusted performance of a mutual fund. It can help the investor understand the return of an investment compared to the risk taken to generate the same.

An investor should prefer those funds with higher Sharpe ratios

So, next time before choosing an equity fund must consider all the above factors

Till then! Happy Investing!

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)