How to select the best Mutual Fund Scheme in India?

Mutual Fund

There are 190 Mutual Fund houses that have over 7000 schemes. This can be very confusing for retail investors.

Before investing, we should be aware what are the goals of our investment. The goals can be.

  • Capital Appreciation
  • Retirement Planning
  • Children’s Education
  • Tax Planning

One more factor to be aware of is the tenure of Investment. Are you looking for a short-term investment Say 1 to 3 years or a long-term investment (5 years and more).

For selecting a Mutual Fund, you should look for these factors:

1. Investment Objective of the Fund:

Whether the fund is debt or equity-oriented, large-cap, mid-cap, or small-cap. If it is a diversified fund, then how is the spread. What needs to be noted is that the objective is matching with your own.

2. Type of Fund:

a)Open Ended Funds: These are continuously available for repurchase and subscription.

b)Close-ended Funds: These funds have a stipulated maturity date.

c)Growth Fund: Growth is accumulated, and payments are made only at the end.

d)Dividend Fund: This Fund pays a Dividend at the end of the year.

3. Asset Allocation:

Asset allocation causes the fund to be classified into large cap, mid cap, small cap, multi-cap, blue chip, or any sector. Safe investors go for Debt Funds while aggressive investors go for small-cap, mid-cap, or multi-cap funds. For stability in growth go for large-cap funds.

4. Investment Method:

Check the minimum investment needed, Methods allowed for purchasing, redeeming, and purchasing additional units.  Also, check the time taken for redemption. A systematic investment plan is a better method to invest rather than a lump sum at one time.

5. Fees:

Expense loading, fees, and charges need to be assessed in advance. Many funds will charge an entry and exit load which will end up with the amount received by you.

6. Past performance:

Though the disclaimer states otherwise, check the past performance of the fund whether it has been giving consistent returns over a period not less than five years. Some schemes tend to give high returns in a short term, but the returns dwindle in long term.

7. Expense Ratio:

A lower expense ratio is what we are looking for. Fixed expenses get divided over a large number of investors if the fund size is big. The ratio is the annual expenses expressed in percentage of their average net asset.

Choosing funds from a variety of mutual fund plans across categories and Mutual fund companies is a challenging task. Therefore, it's crucial to have a basic understanding of mutual funds and how to choose them to make a wise investment choice. Other options include consulting mutual fund rankings provided by numerous independent research organizations and rating agencies or asking a seasoned financial distributor for help choosing funds.

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