Expert Tips for Evaluating Mutual Funds

Mutual Funds

While it is great that there are now funds to suit every objective and risk appetite, the options often make the selection difficult for new investors. Read some of the best expert tips on how to evaluate funds for your investment.

Your investment objective and risk appetite are two of the most important factors on the basis of which you should select an investment option. With many different types of schemes to choose from, like equity, debt, tax-saving, balanced, ETFs, etc. mutual funds are now a go-to option for every investor.

But while the options make it easier for investors to pick the type of fund that perfectly suits them, it is not always easy for a new investor to pinpoint the best fund in that category. To make the selection easier, here are some expert tips for evaluating fund performance-

  1. Historical Performance

Once you know the type of fund in which you’d want to invest, start going through the past performance of some of the top performers. For instance, if you’re going to invest in debt funds, go through the historical performance of at least 5-8 top performers.

When evaluating their historical data, ensure that you avoid selecting funds that are in the list due to their recent performance of a month or year. You should always go with funds that are consistent performers.

  1. Compare with Peer Funds

Once you have shortlisted a few funds on the basis of their consistent historical performance, check their relative performance with the peers. Compare their portfolio, the returns that the funds generated over varying durations, rank, NAV, AUM, and last dividend (if any).

This will provide a clearer picture of the performance of the fund, allowing you to eliminate a few names from the group of shortlisted funds.

  1. Compare with Benchmark

One of the best ways to evaluate the performance of a fund is by comparing it with its benchmark. Every fund has a benchmark and by comparing the fund’s performance with it allows you to measure the performance of your selected fund against market competition.

For instance, equity funds have different benchmarks like S&P CNF Nifty, BSE 200, etc. You can see how your shortlisted funds have performed against their benchmarks, and make a selection based on their consistency.

  1. The Reputation of the Fund Manager

If you’ve followed the steps mentioned above, you’d now probably have around 2-3 funds left for final evaluation. Now that the performance part of the fund is already evaluated, let us check the fund managers of these funds.

Each fund has a manager who is responsible for taking all the investment decisions on your behalf. You can find information about the fund manager on the AMCs website. Prefer funds that have experienced manager/s with an excellent track record.

  1. Fee Structure

Last but not least is the fee structure of the best mutual funds to invest. Check the total expense ratio (TER) and loads to make your final decision.

Prefer funds with a lower TER as the total expense ratio is deducted from your investment amount. While there are no entry loads now, most of the funds do have an exit load of 1% if you redeem your investment within1 year of investment.

Conclusion

Just like stock picking, selecting a fund for your investment is art too. Fortunately, the selection is not as tricky as stocks. Use these steps for choosing the best fund, and there is a major possibility that you will be picking a top performer of the future.

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