How does one choose a mutual fund? It involves looking at a lot of things. In the beginning it might seem like a wave of information, but over a period of time it becomes second nature.
First and foremost, any fund one chooses should be in line with your financial goals. If investing for the long term (at least 5 years; the longer, the better), choose an equity fund. If your goal is short term investing, choose a debt fund. Either way make sure that you take into account the taxation details. Also decide whether you want the dividend or growth option. Choose dividend, only if you need regular income. Ideally, choose a growth oriented fund.
Here is what I look at before making a decision about investing in a fund:
1. Launch Date
I like to look at the launch date to note how long the fund has been in the market. The longer the the fund has been in the market, the longer the history I can look at.
2. Composition
If it is a balanced fund, I like to note if the fund is debt or equity heavy. I choose the mix that suits my goals.
For equity or debt funds, I like to note the break up which any fund provides. E.g. HDFC Top 200 Fund has 8% of its net holdings in State Bank of India. of the equity portfolio in ICICI. The top 10 holdings give me an idea of how the investment is bifurcated
3. Returns for the last 10 years
It is important to note the returns the fund has generated for the last 10 years. Look at both absolute and annualised returns. It will give you a fair idea of the fund's performance.
4. Exit Load
Most funds have an exit load. In any fund an exit load can range from 0.1% to 1% if you withdraw money anywhere between 3 days and 18 months.This is an information to look at up front so that you know that the horizon suits you. If possible, it is best to avoid the exit load.
5. Expense Ratio
Expense ratio is something that will be levied regardless of the time that you are invested and regardless of whether your fund is doing well or not. Unlike the exit load, this cannot be avoided. This is a number to be aware of so as to be aware of the real returns.
6. Returns vs. benchmark
It is good to note the returns of the fund and compare it to the benchmark. Ideally, we want our fund to beat the benchmark. It shows consistency in performance.
7. Websites To Look At
Many websites evaluate funds. A few examples are valueresearchonline.com, moneycontrol.com and economictimes.com. This is certainly not an exhaustive list and I am not recommending these websites. Every website rates funds based on a different criteria and it is important to understand the criteria of ranking.
8.Current Affairs
Taxation rules change. E.g. the 2014 budget changed the way debt funds are taxed. LTCG (Long Term Capital Gains) tax for debt funds kicks in after 3 years instead of 1 year. If you withdraw from a debt fund before 3 years, STCG is applied based on the tax slab you fall under. Equity funds in India currently do not have a LTCG tax i.e. returns are tax free after a year. It is imperative that we align any investment with our goals and study the taxation so as to get a fair idea of the net returns.
9. Gold Funds
Instead of buying physical gold, one can invest in gold funds. I have written about this in detail here. Remember, that gold is a hedge against inflation and should not make up more than 5 to 10% on your portfolio.
Choosing a fund requires careful evaluation. It is also of utmost importance to evaluate your risk appetite. If you are a high risk investor, invest in mid and small cap funds else stick with large cap funds.
First and foremost, any fund one chooses should be in line with your financial goals. If investing for the long term (at least 5 years; the longer, the better), choose an equity fund. If your goal is short term investing, choose a debt fund. Either way make sure that you take into account the taxation details. Also decide whether you want the dividend or growth option. Choose dividend, only if you need regular income. Ideally, choose a growth oriented fund.
Here is what I look at before making a decision about investing in a fund:
1. Launch Date
I like to look at the launch date to note how long the fund has been in the market. The longer the the fund has been in the market, the longer the history I can look at.
2. Composition
If it is a balanced fund, I like to note if the fund is debt or equity heavy. I choose the mix that suits my goals.
For equity or debt funds, I like to note the break up which any fund provides. E.g. HDFC Top 200 Fund has 8% of its net holdings in State Bank of India. of the equity portfolio in ICICI. The top 10 holdings give me an idea of how the investment is bifurcated
3. Returns for the last 10 years
It is important to note the returns the fund has generated for the last 10 years. Look at both absolute and annualised returns. It will give you a fair idea of the fund's performance.
4. Exit Load
Most funds have an exit load. In any fund an exit load can range from 0.1% to 1% if you withdraw money anywhere between 3 days and 18 months.This is an information to look at up front so that you know that the horizon suits you. If possible, it is best to avoid the exit load.
5. Expense Ratio
Expense ratio is something that will be levied regardless of the time that you are invested and regardless of whether your fund is doing well or not. Unlike the exit load, this cannot be avoided. This is a number to be aware of so as to be aware of the real returns.
6. Returns vs. benchmark
It is good to note the returns of the fund and compare it to the benchmark. Ideally, we want our fund to beat the benchmark. It shows consistency in performance.
7. Websites To Look At
Many websites evaluate funds. A few examples are valueresearchonline.com, moneycontrol.com and economictimes.com. This is certainly not an exhaustive list and I am not recommending these websites. Every website rates funds based on a different criteria and it is important to understand the criteria of ranking.
8.Current Affairs
Taxation rules change. E.g. the 2014 budget changed the way debt funds are taxed. LTCG (Long Term Capital Gains) tax for debt funds kicks in after 3 years instead of 1 year. If you withdraw from a debt fund before 3 years, STCG is applied based on the tax slab you fall under. Equity funds in India currently do not have a LTCG tax i.e. returns are tax free after a year. It is imperative that we align any investment with our goals and study the taxation so as to get a fair idea of the net returns.
9. Gold Funds
Instead of buying physical gold, one can invest in gold funds. I have written about this in detail here. Remember, that gold is a hedge against inflation and should not make up more than 5 to 10% on your portfolio.
Choosing a fund requires careful evaluation. It is also of utmost importance to evaluate your risk appetite. If you are a high risk investor, invest in mid and small cap funds else stick with large cap funds.
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