How to pick up the best Mutual Fund ?

In recent years, many people in India have shed off the dismay towards Mutual Funds and are more willing to intelligently invest their hard-earned money and reap the benefits of the market.
But it is not very straightforward to select right Mutual Funds specially if someone is new to investment as one may get overwhelmed by a ton of terminologies out there.

In this article I will try and summarize few criteria which are most important while selecting the right fund and which I wish I knew when I started investing. The `Best` Mutual Fund will vary based on your exact requirements, but these indicators would definitely help you pick the `Right` Funds and and filter out the `Bad` ones.

  • Expense Ratio:- An expense ratio of x% means that if you invest Rs 100 in a Fund Rs x would be used for management of the Fund(paying the fund Manager etc.) and Rs (100-x) will get invested. So lower the Expense Ratio better the Fund.
  • Exit Load:- In some Funds, there is a minimum lock-in period and if you sell your units before this period, the Fund will charge you certain % of money. Not all funds do this. So again, lower Exit Load is always better.
  • Past Return:- While selecting a fund it is important to look at the returns that the Fund has given over past 10 years. But while doing so, see the return for any 5 year window and make sure it's as per your expectations. This exercise is important so that your investment  doesn't disappoint you in times of need.
  • Fund Type:- There are a ton of different types of Mutual Funds (article coming soon on this). To be concise, Value+Focused is generally the most attractive combination for Mutual Funds. Value Funds are those which invest in stocks when their price is at a fall (under or fairly valued) i.e. Rs 150 share selling at Rs 120 due to one reason or the other. Focused Funds are those which have at max 30-40 stocks in the Portfolio. Large Number of stocks in portfolio may cause the profit earned by `good performing` stocks to be nullified by `bad performing` stocks.
  • Current portfolio:- Another important criteria while selecting a MF is to look at their present Portfolio. Portfolio is the breakdown of how much of your money is going into which stock or asset. So select the Fund with a diversified Portfolio across wide variety of sectors. Also pay attention to the portfolio turnover ratio. Smaller turnover ratio means Fund Manager holds his stocks for longer period of time which is a good sign.
  • Check for % Investment in Large, Mid and Small Caps:- Large cap Funds are moderate risk moderate reward funds and often considered for long term benefits. Whereas Small caps are have high risk but can also yield high rewards. Mid cap funds have very restricted options so I wouldn't suggest these.
  • Fund Manager and his past performance :- Fund Manager is the person who is in control of where and how to invest the fund collected from people. You can imagine him as an expert whom you have given your money to invest in the market. So before you opt for any Mutual Fund, its utmost important to do some background research about their Fund Manager like what all the funds he has managed and his past performance in managing those funds. 
  • Asset Under Management(AUM):- AUM is the total fund that a Mutual Fund company (Asset Management Company) has collected for investing in market. According to Government norms, at any point of time a MF cannot hold more than of 35% of total capital in the form of cash. So for a particular MF, if AUM suddenly grows huge (maybe because of its recent good performance), it runs into problem because they are abide to invest at least 65% of the total AUM. Therefore in a haste to get rid of extra fund, they may land up investing in not-so-good funds. That's why if you find two funds to be more or less similar then go for the one with lower AUM.
So those were few key points which one should always look into while selecting any Mutual Fund.

We will discuss about different types and categories of mutual funds in the next article which will be coming soon.

- by Deep Shekhar