Mutual funds as an investment avenue for the retail investor have gained immense popularity over the years. That is not to say that investors have become adept at selecting mutual funds with ease and accuracy.
Here are 10 pointers for investors who find the exercise of selecting and evaluating mutual funds a tedious one.
1. A fund sponsor with integrity
An investor must check the sponsor's (promoter) record in the financial services arena. Apart from a consistent and clean record in financial services, sponsor(s) should have requisite experience and background in managing mutual funds be it in India or overseas.
2. An experienced fund manager
The fund manager must be experienced, which is best reflected in the returns he has generated on funds previously/currently managed by him.
3. A suitable investment philosophy
Every fund manager has his own individual style and investment philosophy. While some managers are aggressive, others are passive. The investor must choose the fund that best reflects and matches his own investment philosophy.
4. The correct fund by nature
Open-ended funds:
An open-end fund is available for subscription throughout the year. Investors have the flexibility to buy or sell any part of their investment at any time at a price linked to the funds -- Net Asset Value (NAV).
Close-ended funds:
A close-end fund begins with a fixed corpus and operates for a fixed duration. The fund is open for subscription only during a specified period. When the period terminates, investors can redeem their units. Close-ended funds may be listed on the stock exchanges to impart liquidity to the investment.
5. The correct fund category
Mutual funds offer different categories. These can be classified as:
Debt funds
They seek to provide a regular source of income by investing in fixed income securities like debentures and bonds.
Equity Funds
They aim to grow money over time (i.e. capital appreciation). Here the investment focus is mainly on stocks/shares. Historically, stocks have outperformed other asset classes like bonds, fixed deposits, gold, real estate over the long term -- 10 years.
Balanced funds
The fund attempts to maintain a balance between fixed income securities and equities in a pre-determined ratio like 60:40 equity -- debt for instance.
The investor must invest in mutual fund categories, which meet his criteria in terms of need for regular income, capital appreciation, and safety of principal.
6. Fees and charges
Asset management companies (AMC) charge a fee for managing investor monies. In other words, your mutual fund deducts charges and fees from the net asset value (NAV) of the fund. As an investor you must be aware of the fees and charges of the AMC. Two schemes with more or less similar performances would generate different returns if one of the two schemes charges higher fees.
7. The load
An investor may be required to pay a load either at the time of buying the units or at the time of selling the units. Again, the returns of two similar performing schemes may vary depending on the load charged by the scheme to the investor.
8. The tax implications
The investor needs to understand the tax implications before investing in mutual fund schemes. Investments in mutual funds have varying tax implications depending on whether you exit from the fund before or after 12 months from the investment date. Tax-saving funds in particular make attractive investments from a tax perspective as they offer tax relief under Section 88.
9. Investor service and transparency
Services offered by mutual funds vary across funds. Some MFs are more investor friendly than others, and offer information at regular intervals. For instance, some funds disclose the expense ratios, an important criterion for fund selection, once a year, some disclose it once every 3 months, while a few disclose it every month.
10. Fund performance
Every fund is benchmarked against an index like the BSE Sensex, Nifty, BSE 200, CNX 500. The investor must track the fund's performance against the benchmark index. He must also compare its performance with other funds from the same category. He should also see the fund's calendar year performances over the years.
