Mutual funds have fast gained popularity due to the wide variety of options available. Today, you can easily find a mutual fund that matches your specific investment goals.
As more and more investors are using mutual funds to meet their investment goals, there is a visible surge in mutual fund assets in India. The total asset size reached ?60 trillion as of May 2024. In FY24, domestic mutual fund assets grew by 34%, the largest increase in seven years.
If you want to pick the right mutual fund for your investment goal, here are some top tips and strategies that you can use.
The first step in selecting the right mutual fund is to clearly define your investment objectives. Ask yourself whether you want to invest for short-term gains, long-term wealth accumulation, retirement planning, or funding your child's education. Different mutual fund schemes cater to different goals, such as capital appreciation, regular income, and liquidity.
1. For short-term goals, you can consider debt funds such as Ultra-Short Duration Funds, Short Duration Funds, or Overnight Funds. These options offer stable returns and quick access to your money.
2. For long-term goals, a mix of equity and hybrid funds can be beneficial. While equities are volatile in the short run, staying invested for a longer period can yield significant benefits.
Understanding your risk tolerance is equally crucial. It is advisable to choose funds that match your risk appetite. The Securities and Exchange Board of India (SEBI) categorises mutual funds into six risk levels:
Before investing in mutual funds, it's crucial to check their past performance to gauge their future potential. Focus on 'risk-adjusted returns,' which can be evaluated using the Sharpe Ratio. This ratio measures how much return a fund provides for each unit of risk taken. A higher Sharpe Ratio indicates better performance relative to the risk. If you want to know a mutual fund scheme's Sharpe ratio, look at the fund's fact sheet, generally available on the fund house's website.
You must also consider the expense ratio of mutual funds. It includes management and administrative fees. These costs can impact your returns and investment goals. According to SEBI guidelines, equity funds typically have an expense ratio between 1.05% and 2.25%, while debt funds range from 0.8% to 2%.
SEBI has recently proposed a new rule requiring mutual funds to disclose their risk-adjusted returns. This measure aims to help investors better understand how much return a fund generates relative to the risk it takes. SEBI suggests using the Information Ratio (IR), which compares the excess return of a portfolio to its volatility, as the standard metric for this disclosure. This move is intended to enhance transparency and standardise performance measures across all mutual funds.
Also Read - Mutual Funds vs Equities: Understanding the Difference
The capital pooled by mutual funds is invested across various assets depending on the fund’s objective. If you’re planning to invest in an equity fund, you can take a look at the portfolio’s sectoral allocation to know where your money will be invested.
1. For instance, lately, technology and financial services have been dominating the portfolios of most equity funds.
2. For debt funds, look at the credit quality and maturity of securities within the portfolio. Funds with higher exposure to AAA-rated securities are generally considered safer.
Another crucial aspect to examine is the fund manager's expertise, as it can significantly influence the fund’s performance. Check for the manager’s experience, investment philosophy, and performance during various market cycles. Consistency, especially during downturns, is a good indicator of a competent fund manager.
When investing in mutual funds, you may be confused between investing a lump sum amount or Systematic Investment Plans (SIPs). Lump-sum is basically a one-time investment that requires you to have sufficient capital. SIPs involve smaller and regular amounts to be invested over time.
SIPs are an effective way to build wealth gradually while reducing risk. By investing a fixed amount regularly, you get to benefit from rupee cost averaging, which helps smooth out market volatility. Over the long run, this approach helps in buying more units when prices are low and fewer units when prices are high.
Mutual funds can be a good alternative to investing in individual securities, offering diversification, professional management, and ease of access. With these strategies, you can invest in different mutual funds to fulfil multiple investment objectives. If you want to enhance your understanding of mutual funds, you can explore the resources available at Sharekhan Knowledge Center.
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