Wealth Guide: Know how to select right mutual funds for long-term investments

Mutual Funds: Investing in any instrument haphazardly is riskier than not investing at all. Like most good things in life, investing also requires a methodical approach. Investing in every new mutual fund scheme launched in the market because its net asset value (NAV) is at par is not the right approach to investing. There are well laid out steps and methodology to make an investing decision. Vikas Singhania, CEO, TradeSmart suggests at the steps needed to select the right mutual fund investments for the long term.

Explaining the importance of Goal Setting, Vikas Singhania says, "Just like before leaving the house we know our destination, similarly before selecting our investments we need to know why we are doing it. Investment goals can vary from really long term ones like retirement to children's education and marriage, to short term goals like a family vacation. Based on the duration and the funds required to meet these goals we can choose our funds." 

"For long term goals, it is better to select equity oriented schemes that invest the lion's share of their corpus in shares. The longer duration of the fund would mean that the investor does not have to worry about the short term volatility of the market. Over a longer period equities as an asset class have given much higher returns than others," Singhania added.

"When selecting a fund one should look for funds that have a higher risk-adjusted return (Sharpe Ratio). In other words, one should pick up funds that offer a higher return for the same level of risk. Also look for funds with a higher beta, especially in long term investments. Though high beta would mean that these funds will move higher and lower than the benchmark index they are pegged to. However, over the long run, as indices tend to move higher, a high beta fund would yield a better return," he advised.

Advising on type of fund to choose, he said, "Within equities, there are further classifications of the type of fund one can invest in. A choice has to be made between a direct and regular plan. In the direct plan, there is no intermediary which would mean the entire amount invested will be deployed by the fund house without deducting any commissions. One also has a choice between growth and dividend plans, but since the goal of this investment is for the long term, it is better to invest in a growth plan to get the complete benefit of compounding."

Opining about Fund performance, he said, "A fund’s performance and the reputation of a fund house matter, especially when it comes to long term investing. One would rather like to trust their money with a fund house with a sound reputation. A fund with a strong performance indicates that it has survived and performed well in multiple market cycles. The fund manager knows how to tackle different stages of the market."

Moroever, on Expense Ratio, he suggested, "Expense ratio is the fee that an asset management company (AMC) charges the investor to manage their money. Since very few funds are able to beat their benchmark index returns, there is little point in paying extra commissions to the fund houses. Investing in passive funds also makes more sense than in active funds, especially when one is investing for a long term period. Small commissions every year chip away a larger portion of the returns in the long run. The same goes for entry and exit loads that are charged. To put it in a nutshell, one should look at funds that have the lowest expense ratio and entry and exit loads, but at the same time the fund should be among the leaders if not the leader in terms of performance."

"Selecting funds is not a random process, a little bit of research and patience can help in selecting a fund that is right to meet your long term goals," he concluded.

(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.)