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How to Compare Mutual Funds?

  • Apr 18, 2024

A wide range of investment alternatives like stocks, bonds, and combinations of the two, are provided by mutual funds. These possibilities can be further broken down into a number of categories and subcategories. It can be complex for investors to choose the best fund to invest in with so many options available, and it can be challenging to determine which of two funds in the same category is superior. So, let's find out how to compare mutual funds tools, keeping varied factors in mind.

What are Mutual Funds?

It is an investment pool that has several investors and is overseen by a qualified fund manager. The fund manager invests this money in a variety of instruments, including cash, bonds, and stocks. You hold a share of the assets and any profits derived from them as an investor.

How to Compare Varied Mutual Funds?

Comparative study is a crucial step in choosing the finest mutual fund for your financial objectives. There are other crucial factors to take into consideration, so you shouldn't limit your attention to the fund's historical returns. Returns are only one element to take into account.

Consider the following aspects when you investigate the mutual fund comparison tool: -

1.Identify Your Investment Goals

Setting your investment goals is the first and foremost step in evaluating mutual funds. When making a mutual fund investment, what are your goals? Which would you prefer: steady income, steady growth, or both? Knowing your objectives will help you to focus on compare funds that support your aims and reduce the number of possibilities available to you.

2. Benchmark

A benchmark functions similarly to a mutual fund performance standard. It provides an indicator of how well a specific mutual fund has performed in relation to the benchmark. Thus, we can conclude that "Scheme A" has outperformed its benchmark if, over 5 years, the mutual fund has returned 15% while the benchmark has only returned 12%. 'Scheme A' can assist investors in determining whether it is a better option than other funds. 'Scheme A' may be a better choice if other funds haven't performed as well as their benchmarks.

3. Assess Your Risk Tolerance

Mutual fund investing entails risk. While some funds are more aggressive, others are more conservative. When researching mutual funds, it's important to know how much risk you can afford. Consider the amount of loss you could accept in the event of a market collapse or a specific fund's underperformance.

4. Consider the Fund's Track Record

Examining a mutual fund's performance history is one method of comparison. This entails examining the fund's performance over an extended period of time, ideally five to ten years. A strong track record shows that the fund has produced returns on a regular basis and has handled risk. Though it could offer you a decent indication of the fund's potential, keep in mind that past performance does not guarantee future outcomes.

5. Expense Ratio

An expense ratio is a cost related with managing your money in a mutual fund. It includes expenses for professional management, which is a proportion of your investment and can have an impact on your returns, as well as administrative charges. Selecting a mutual fund with a lower expense ratio will always result in a lesser overall profit margin when comparing them.

Recall that the expense ratios of normal plans are larger than those of direct mutual fund plans. Thus, be sure you're comparing normal plans or both direct plans when comparing two funds. Avoid combining the direct plan of one fund with the regular plan of another.

6.Years in Existence

Investigate a mutual fund's track record throughout time and duration in addition to its performance when comparing them. A mutual fund may be a safer option if it has been in existence for some time and has a successful track record. Typically, these funds are overseen by reputable, experienced businesses. It's similar to suggesting that you can be more assured of a mutual fund's capacity to manage various market scenarios the more experience it has.

The Bottom Line

While comparing mutual funds can seem like a difficult chore, selecting the best one for your portfolio can be made easy by following these steps. When comparing mutual funds, don't forget to determine your investing objectives, evaluate your risk tolerance, and consider critical elements like fees, diversification, and track record. Additionally, before making any investment decisions, always seek advice from a financial counsellor to be sure they are in line with your entire financial plan.

Team Sharekhan
by Team Sharekhan

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