How To Choose Mutual Funds –Selection Tips For Mutual funds

Choose Your Mutual Funds

Mutual fund is a trust that pools the savings of a number of investors with common financial goal.  Once the savings are pooled, the mutual fund will invest the savings in stock markets.  Stock market trading requires careful analysis of scrips and market conditions all the time which needs professional services that are too costly to afford for the small investors.  Mutual funds are meant for the small investors who is interested in investing their savings in the stock market in the safest way possible.  Mutual funds are usually fully equipped to carry out thorough analysis with the help of professionals in the respective fields and can provide superior returns. 

Even though, no stock market related investments can be termed safe with certainty as they are inherently risky. However, different funds have different risk profile which is stated in its objective. Funds which categorize themselves as low risk, invest generally in debt which is less risky than equity. Anyway, as mutual funds have access to services of expert fund managers, they are always safer than direct investment in the stock markets.

How Do Mutual Funds Work?
How Do Mutual Funds Work?

Tips For The Better Selection Of Mutual Funds

  • Give shape to your own needs: A small investor should have many financial needs like they would like to receive a monthly income, or they should like to receive annual income; then there are investors looking for a lump sum amount at the maturity or for the tax benefit on the income from mutual funds. So fix what you prefer over the available alternatives. Shape your own needs and fix what ultimately you need out of your savings you have kept apart for investment. Not all mutual funds serves the same purpose. So, you should know why you are investing.

Personal Financial Planning Tips : How to Select a Good Mutual Fund

  • Duration of investment: You should have an idea of the duration of investment. Are you intend to invest your savings a single year or more than that? Is it not more than five years? This will help you to select the schemes which is most suitable for your needs. There will be different schemes available depending upon the duration of investments. It is pertinent for the investors to have long term duration of 3 to 5 years in mind if they wish to invest in equity oriented funds.
  • The reliability of the promoter company: Many new companies are starting the mutual funds however, it is always better to invest in the mutual funds that have been launched by the companies that have a track record and that are familiar with the Indian markets. The experience makes it perfect seems to apply to mutual funds also. Many of the new mutual funds are performing well, but many others will not be as successful as the already established ones.
  • Past performance of the funds: Always go for the mutual funds that have a successful track record for five to ten years. Just check the past performance of the mutual funds and once you find the track record to be pretty good, we could very well assume it will continue its performance. A long track record is necessary because any fund can perform well in short span with some luck element, but to gain a long track records it really needs efficiency.
  • Comparison: If you are analysing the track record of a single mutual fund it is not going to provide you any better analysis neither it will be informative in a positive way. So it is very much important to compare the performance of mutual funds under considerations with that of the bench marks and with its competitors performance.
  • Returns and risks: We are going to make investments because we need returns. But returns need not necessarily be the only criteria. There are risk factors in the trading of stocks even if it is done by mutual funds. So consideration must be given to the risk element also. One should evaluate the risk element involved and whether the return is worth the risk taking. Debt offers less risk and medium returns while risk with the equity is much more and the outcome varies.
  • Port folio concentration: Unlike with the asset management companies, mutual funds cannot show the individual investment port folios. All the investors in a scheme shares the same outcome depending upon their investments. However, funds that have a high concentration in particular stocks or sectors tend to be very risky and volatile. Hence, investors should invest in these funds only if they have a high risk appetite. Ideally, a well diversified fund should hold no more than 40% of its assets in its top 10 stock holdings.

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Peter Owen profile image

Peter Owen 5 years ago from West Hempstead, NY

good non technical starter for novices.

Kevin Peter profile image

Kevin Peter 3 years ago from Global Citizen Author

Hi Peter and share trading,

Thanks for both your comments.Very glad to know that you found my hub information effective.

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