How To Choose Good Mutual Funds
Importance Of Choosing Good Mutual Funds
All of us are aware that a mutual fund is a pool of money which is managed by a professional Fund Manager. It collects money from a number of investors and invests the same in equities, bonds, money market instruments and other securities. That’s why we see many types of mutual fund i.e. equity, debt, monthly income plan, hybrid fund etc. Mutual funds are ideal for investors who do not have large sums for investment. These are also suitable for those who neither have the inclination nor the time to research the share or bond market. But to get the maximum benefits, it is quite necessary that you choose good mutual funds for your investment.
Can Top Rated Funds Be Considered Good Mutual Funds
There is no doubt that good mutual funds can be ranked higher but you must know that mutual fund ratings are dynamic. These ratings are based on performance of the mutual fund scheme over time. So, a mutual fund scheme that may be on top of the rating list as of now, may not necessarily maintain the same rating after some months. At the same time, a top rated fund can be considered for investment. But one should track the investment in a mutual fund scheme with respect to the scheme’s benchmark to evaluate its performance periodically. This tracking helps us to find the good mutual funds.
Also, ratings are based on the category of the mutual fund scheme. So, a scheme can be 5-star rated, but the category itself may not be good enough for investment. For example, you may choose a sector scheme which is 5-star rated, but it’s performance may be worse than a 3- or 4-star diversified equity scheme. And, remember that ratings do not cover New Funds Offers (NFOs). So, if you want to invest in NFOs you would have to do it without seeing any rating. At the same time, you may miss out on some good mutual funds scheme if you just invest in 5-star schemes.
Can MF Schemes OF High NAV Be Considered Good Mutual Funds
This is a misconception that high NAV means good mutual funds. You should remember that the NAV of a scheme is just a reflection of the market value of the underlying shares held by the fund on any day. Mutual Funds invest in shares, which may be bought or sold by the Fund Manager depending on the scheme’s investment strategy. At the same time, a high NAV does not mean the fund is expensive. In fact, high NAV indicates good performance of the mutual fund scheme over the years. But as told earlier, the past performance may or may not be shown in the future. So high NAV MF schemes can be good mutual funds to be considered, but it is not the only criterion.
Then How To Choose Good Mutual Funds
The best way to choose good mutual funds is to take expert advice. That expert should be a qualified financial planner or financial advisor. But if you want to start on your own, you must keep in mind the following points before choosing good mutual funds:-
1. Shortlist 3- to 5-star schemes, not just 5 star mutual fund schemes. Because 5-star schemes can get lower ratings in future, similarly 3 and 4-star schemes may get 5-star ratings in future.
2. Look which is the fund house and who is the fund manager of your selected mutual fund scheme. These two are also important criteria while selecting good mutual funds. Experienced and time tested fund house and fund managers are likely to perform better in the future as well.
3. For selection of good mutual funds, you should also consider other parameters like expense ratio, size of fund and category of the scheme. Lower the expense ratio, better will be chances of more return. And as the size of the fund increases, the expense ration goes down.
4. The category of the scheme is important for selecting good mutual funds because the category defines the investment objective of the fund. If you are not comfortable with taking too much risk, you may consider hybrid (debt oriented) or debt funds. Similarly, you may choose monthly income plans if you want some regular income from your investment.
Keeping in view the above parameters, you can definitely select good mutual funds for your investment. If you have any question about mutual fund investment, do write to me. I will try to reply you as soon as possible.