How to Choose the best mutual funds in India?
Being an investor, are you curious to learn about how to choose the best mutual funds in India in 2020.
Then you are at the perfect destination.
It is well said that the secret to investing is to figure out the value of something – and then pay a lot less.” Joel Greenblatt
Today, our topic of discussion centered on How to select top performing mutual funds in India?
This question has created the most sophisticated base in the minds of investors, who want to make ideal decisions on investments in Mutual Funds.
Even the personalities who keep on investing money in the stock market securities face unexpected returns from the investments. Then what may be the reason for such outputs?
- “I had invested in a Large Cap company but achieved very less return?”
- “Even the top rankings funds provided me zero returns.”
- I made an investment in a good performing firm, but it does not provide me that good return which I was expecting as per its current performance”.
If the same above statements hope into your mind also and terrify you then you should surely read this article. It will tell you your mistakes which you attempt while selecting your plan. Not only this, it will provide you suggestions on the basis of which you’ll be able to select your successive mutual fund plan.
Let us learn about how to pick top mutual funds for your portfolio?
First, you should avoid the following misconceptions about the selection of best Mutual Funds.
- A good mutual fund is one that is placed in the top rankings or which has been given 4 or 5-star ratings.
- The firm which has performed well this year will perform well in upcoming years also.
- Do not depend totally on debt funds on the basis of the perception that it provides you regular fixed returns because it may sometime provide you nothing due to economical-changes.
The reason to avoid the above conceptions is that because the factors which you consider while selecting the funds do not hold 100% accuracy for forming your decision.
If the funds were so easy to select on the basis of basic factors like rankings, ratings, and current year performance, then why there is a need for expert advice and why do you face losses on returns which mesmerize you totally?
So, it’s not that you should avoid the factors, but it’s just like that you should not take these sensitive investment decisions just on the basis of these front factors.
Factors for choosing mutual fund category
1) Time Horizon
| Time Horizon | Mutual Fund |
| 1 day – 3 months | Liquid Funds |
| 3 months – 1 year | Ultra Short-duration Funds |
| 1 year – 3 years | Short-duration funds |
| 3 years – 5 years | Hybrid/Balanced Funds |
| More than 5 years | Equity Fund |
2) Risk tolerance
| Time Horizon/Risk | Low Risk | Medium Risk | High Risk |
| Short Duration (up to 3 years) | Liquid Funds, Ultra Short-duration Funds | Short-duration Funds | Arbitrage Funds |
| Medium Duration (3 years – 5 years) | Short-duration Funds | Balanced Advantage Funds | Equity Hybrid Funds |
| Long Duration (5 years and above) | Large Cap Funds | Multicap Funds | Mid Cap Funds, Small Cap Funds |
Now, I’ll tell you some but important steps to select a top-performing mutual funds among so many available funds in all around India.
Below are the points which we will pick up one by one and your steps to select the fund should go in parallel to these steps in sequence only. Ok?
Important Points to Consider While Selecting a Mutual Fund
- Investment Objective
- Outlook for Economy
- Rankings
- Assets Under Management (AUM)
- Exit Load
- Expense Ratio
- Consistent Performance
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Let’s discuss each of them.
Investment Objective
Your objective for doing investment should be very clear and precise i.e. why you are investing? The objective can be accumulating wealth for marriage purposes, or higher education to children, or the same reason for retirement.
As you can see that these objectives seem to be the long-term goals, so these cannot be acquired just in a day. In fact, it requires a lot of patience and a well-thought-out decision on securities to pour your investment in.
To invest the money for fulfilling the long-term objectives, you can invest in long-term debt funds or equity funds for at least 3 years. Your decision to go for equity will be well appreciated if your risk appetite is high and your investment horizon is equal to or more than 5 years. The equity investment will although create suspense on your returns but only this can provide you higher returns on your investment.
But if your objective is to play a safe game and earn in a short duration without bearing any risk, then you should go for short-term debt funds. They are risk-free and provide you regular (not necessarily) returns.
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Outlook for the economy
You should have knowledge about the up and downs of the economy. Based on the past and present scenario of the stocks market, you should have that capability to assume the economy standard or the market price of stocks in the coming 12 years.
The knowledge will help you understand the backend theories of economies which could be understood only with the experience. It is the imaginary power of the individual that on the basis of his assumptions and outlook of the economy, he can take appreciating decisions on investment.
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Rankings
It is the most observed and is observed very first right after seeking the fund name. The rankings and associated ratings are checked by the interesting individual and according to him, the rankings can play a better role in selecting the best funds for them. Best funds mean the top rankings i.e. 1 or 2 for them.
Actually, this is not true. The top-ranked funds for one purpose might not be the best for another purpose. This angular observation from every angle should be understood thoroughly by you.
I know that this will become a very tough exercise for you, so you can visit the top ranking websites like CRISIL and the ValueResearchOnline for a readymade material of this. These two ranking portals give ranks to various mutual funds on the basis of various factors like-
- How have the funds performed in the past 5 years?
- At what percent it is returning the returns on investment?
- How much the funds have bared the risk- low, moderate or high risk, and accordingly how much it has provided returns?
- Funds diversification in various other funds?
On the basis of the above factors, it provides rankings to the funds. You can visit the sites and choose your fund on their ranking base.
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Asset under Management (AUM)
The AUM is the value of total assets which are hold by the institution on behalf of all the clients under its hood. It means the number of clients deposits some money for investment to the institutes for the purpose of investments. The number of client’s invested money is the total Asset Under Management of that institution.
The higher the AUM will be, the higher will be the capacity of the fund and vice-versa.
The high value of AUM helps the fund to crawl upwards in the ranking lists while it may go downwards due to the value of its low assets.
You can check the AUM value of the funds and the AUM which you found is below the average value, you can drop that fund. The AUM gives a fair idea and a nice level of confidence for selecting the best mutual fund.
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Exit load
Exit load is the penalty load for your attempt to withdraw your already invested money before its maturity period.
It should be checked by you that the funds which you are opting for have any exit loads or not. It will be best if the fund has no exit loads because it will not harm your savings of till the time anymore. An exit load of 1% even can reduce your earnings thus making a little but a touching difference.
So, you should opt only that fund which either has no exit loads or they may have minimal exit loads.
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Expense Ratio
The expense ratio is the total expense percentage which is incurred in your whole investment tenure. It should be noted down that your expense ratio is included in the Net Asset Value of the Fund, so it should not be again bared by you. The expense ratio is collected from the investors by the professionals of mutual funds for all the services they render to them.
You should observe the expense ratio of the funds and expense ratio up to 1.5% can be done OK by you.
Actually, the expense ratio eats up your returns. Means, if your funds NAV are 20% and the expense ratio is 3 %, then you will get your returns on 17% and not on 20%. The 3% value will be deducted as the expense ratio.
It should be noted down again that the NAV comes after deducting the expense ratio. So, do not spend again on the expense ratio. OK.
So, the higher the expense ratio will be, the lower your returns would be.
Consistent Performance
You should check the stability of the funds. It means that rather than observing just one-year performance of the fund in the market, you should check its past 3 or 5 year’s performance. It will deliver you a clear picture of the behaviors of the fund in different market conditions and will also provide you its quality and weak factors.
On the basis of at least 3 years of performance, you can select the fund.
A Guide to Picking Winning Mutual Funds
- Why You Should Always Buy No-Load Mutual Funds. …
- Pay Attention to the Expense Ratio—It Can Make or Break You! …
- Avoid Mutual funds with High Turnover Ratios. …
- Look for an Experienced, Disciplined Management Team. …
- Find a Philosophy That Agrees With Your Own When Selecting a Mutual Fund. …
- Look for Ample Diversification of Assets.
Dear investors, investing is indeed eminent for building long term wealth.
It is suggested to get cues from the leading investors who have conquered the market!
Conclusion
Dear readers, I wish that your query pertaining to how to select mutual funds for investment in India is sorted!
It is advisable to take into consideration all the above factors. Once you understood the above concepts, you will never face the problem of unexpected results (which you were facing due to lack of knowledge). Just focus on the hidden facts and just not only on the front details.
If you have any doubts or you have any queries, then let us know.
If you want our help with making decisions regarding the investment then we are always there to help you out.
Just comment in the comment box and let us know your response.
Always remember that “All intelligent investing is value investing – acquiring more than you are paying for. You must value the business in order to value the stock.”
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