Mutual Funds are investment vehicles approved by Securities and Exchange Board of India (SEBI) to pool surplus funds from investors and deploy these funds into the money market and stock market to earn return for its investors.

Each Mutual Fund Asset Management Company (AMC) has various mutual fund schemes catering to different investment objectives of investors. Due to the problem of plenty, investors are often bewildered as to which scheme should they invest into. In this article, we break down 10 points that you need to consider to understand whether a scheme is good for you or not.

Investment Objective

Before getting into any kind of number crunching, one should first make sure if his investment goal is in line with the investment objective of the mutual fund scheme. This information can be procured from the factsheet of these schemes.

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Fund Manager

The past performance of the fund manager, his choice of stocks, his inclination towards a particular corporate group, his outlook on the financial markets and his understanding of global macro-economic factors plays a pivotal role in achieving the investment objective.

Analysing Risk

This is another behavioural aspect one should take care about. If you intend to take less risk and cannot see any drawdown in your portfolio, equity and corporate bond mutual funds are not for you. You should rather opt for sovereign GILT funds. Always keep in mind that risk and reward go hand in hand. Hence higher the risk you are willing to take, higher the rewards you can expect.

Also Read: How is income from Mutual Funds taxed in 2024?

Asset Allocation

It is well known quote that “Do not keep all your eggs in one basket”. It holds true in investing as well. Hence to diversify you may even consider mutual funds which has exposure to multiple asset classes like equity, debt and gold as well as international equity. You can invest into a Multi Asset Class scheme of one AMC or different schemes for each asset class.

Investment Horizon

It is possible that you may need the amount invested after 1 or 2 years. Hence you intend to invest it rather than keeping the money idle. It is recommended that such funds be invested into debt instruments rather than equities. Equity investing should be considered when the investment horizon is more than 2 years. Further within equity, Large- cap funds should be chosen for a horizon up to 4 years, Midcap funds for 4-7 years and Small or Microcaps for more than 7 years.

Scheme Performance

The scheme’s performance must be measured vis-à-vis its benchmark as well as the category average. This performance must be checked for the past various time horizons so that performance during multiple market cycles can be reviewed. You may infer that not one scheme is topping the charts during all time frames. Hence scheme performance should be one of the factors and not the sole factor for choosing a scheme.

Scheme Returns

It is customary for AMC websites, Factsheets, online investment portals to present either absolute or annualised returns over multiple time frames. It is called Point-to-Point return. Such comparison can be deceptive due to recent uptrend/downtrend in the markets. One should instead check the Rolling returns of a scheme to understand the performance of the scheme during all cycles of the market.

Expense Ratio

After going through the above steps, you may conclude a couple of Active MF schemes are a great deal. But some passive funds are also giving neck and neck competition on higher time frames. After considering the expense ratio, you realise that the passive funds are instead giving better returns than active ones. Hence expense ratio must be reduced from your total returns to derive your net returns.

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Modified Duration

Modified duration is a measure of how much a bond’s price changes when interest rates change by 1%. Interest rates in the economy may keep changing depending on the Central bank’s consensus about inflation and its monetary policy. Bonds with higher durations have greater price volatility than bonds with lower durations. The mutual fund scheme’s duration is an average of its constituent’s duration. Hence one may choose the scheme which has its modified duration coinciding with his target maturity and interest rate risk taking capacity.

Credit Rating

Just like individuals like us have a CIBIL score which undermines our credit repaying capability, the corporate debt market has credit rating agencies like CRISIL who assigns score to the bonds issued by these corporates. Hence if as per your asset allocation strategy you need to invest X% in Debt, but you don’t want to compromise on returns, you can invest into mutual fund schemes which has a portfolio of low rated bonds (called Credit Risk funds). Hence one should check the credit rating of the bonds a scheme has invested into before investing into it.

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Disclaimer: The above content is for informational purposes only. The 1% News recommends consulting a SEBI-registered investment advisor before making any investment decision.