How to find out if you are investing in the right mutual fund?

The mutual fund industry has seen immense growth in recent years. According to numerous statistics, there has been a 5 ½ fold increase in the last ten years.

This is simply because seasoned investors have realized the potential of mutual funds and have now started investing in them through SIP or Systematic Investment Plans.

The vast universe of mutual funds often seems daunting to new investors because of the large investment horizon and involved risk profile.

As such an investor needs to know whether he is investing in the right mutual fund or not and whether the investments can meet his set targets and achieve desired goals.

There are normally two ways to go assuming you are interested in investing in the best mutual funds. The first is by yourself and the second is through a financial advisor. 

An all-important question at such times is whether an investor has the required know-how to conduct a proper mutual fund analysis and determine whether he is on the right path. 

For that, you can take the help of a reputed financial advisor or financial expert. This service is available on the EduFund app where both new and seasoned investors can opt for the services of the SEBI registered investment advisors and experts in investment management for investing in the right fund. The app also helps to stay updated on the mutual fund investment market.

Parameters that help to analyze whether you are investing in the right mutual fund

1. Expense ratio

The expense ratio is charged annually by the mutual fund for managing the investor’s money as a percentage of total assets. The expense ratio at the end of the day will reduce the available returns hence the investor must look for mutual funds that have a low expense ratio.

Minimize the expense ratio by opting for direct mutual funds as it does not charge broker commission or intermediary fees. Also, compare the expense ratios of preferred mutual funds as it will help to decide whether the investment is the right one or not. 

2. Performance of mutual fund against a set benchmark

Each mutual fund scheme has a set benchmark that it tries to outperform. The investor must check for the benchmark to understand the percentage return that is considered a good performance.

Compare both benchmark and actual performance to identify whether you have been investing in the right mutual fund.

If a mutual fund consistently generates more returns and outperforms the benchmark index then the investor can know that he is doing right by his investment portfolio.

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3. Level of risk

Mutual funds are subject to risk and checking the level of the risk factor for every scheme is as important as checking for the expected returns. The risk is often defined in terms like low, high, moderate, moderately high, and moderately low. 

Generally, the schemes disclose the level of risk to make the investor aware of the involved risk factor. Investors must ensure that the higher the risk higher is the return on the investment commensurate with the risk.

4. Fund’s history

Look at the fund’s history to know whether you are investing in the right mutual fund. Knowing about the long-term previous performance of mutual funds is the right step in determining whether the fund has generated good returns over the last few years. 

If the fund has seen one or two down cycles over the last five years and has regrouped once again to give solid returns then investors must believe that their investment is at par.

5. Portfolio turnover ratio

The higher the Portfolio Turnover Ratio, the higher the buying and selling of the assets. This leads to higher transaction charges or brokerage fees. The portfolio turnover ratio helps to minimize the net returns from the investment.

Investors must calculate the net return and compare funds so that they can know whether their investments are on the right path.

6. Fund manager

The mutual fund manager can help in carrying out the necessary due diligence that will boost the chance of better gains. The investor must look at the performance history of the manager to know about his experience in handling mutual fund schemes. 

A good reputation of the fund manager increases the investor’s confidence in the related schemes and helps him to know he is investing in the right funds.

Conclusion

An investor can determine whether he is investing in the right mutual fund if he can achieve higher returns at comparatively less risk.

Selecting the right fund might seem a daunting task at the onset but a little research and understanding go a long way in finding the best mutual fund investments.