Examine fees and exit loads, read the offer document, analyze portfolio and holdings but here is a lot more.
By Guy Avtalyon
When starting to make the investment decision it’s important to know what criteria to use to know how to select the right mutual funds. If you don’t know anything regarding mutual funds and you are interested to invest in mutual funds, you are always confused about where to begin.
That’s the beauty of investing in mutual funds! You do not need to be an expert or even a finance freak to start investing in mutual funds.
One of the most frequent questions is how to select the right mutual funds to invest in.
Who manages mutual funds?
Mutual funds are managed by professional managers.
But not all funds are equally well. There are many funds that are not able to beat the index. That’s why it’s really important for you to select the right mutual funds that will fulfill your investment goals.
Most beginners just look at past performance while researching the best mutual funds to invest. But there are two equally important factors to be checked before selecting any fund: The objective of the fund matches your investment goals and what are the different risks associated with the fund.
Mutual fund investing is a long-term ratio. It’s different from the direct investment in stocks, where people can change the stocks fast, mutual funds are a long time task. Most people hold their funds for over 8 even over 10 years. Hence, it’s important that you choose the right fund and avoid ones that might result in you to lose both time and money.
How to select the right mutual funds?
I’ll show you, step by step.
Read the offer document: One of the most voluminous documents, also known as the prospectus. The first and the biggest step while choosing a mutual fund is to read the offer document. From the top to the bottom.
There you can find all the important details like the fund’s objective, scheme type, past performance, details about the asset management company, classes of the underlying assets, etc. It’s not difficult to understand these documents.
Match the goal of the fund with your own. Every mutual fund has a specific aim. And based on that aim, they decide different factors like asset allocation (equity to bond weight), risks, dividend payouts, tax benefits, theme/sector focus, etc.
You have to read the offer document of the fund in order to identify whether the fund aims to meet your investment needs. If their aims are not pertinent to you, it might not be the right option to invest in those funds.
Examine fees and exit loads. The mutual funds will charge a fee for their services and to meet different expenses. This expense ratio can be 2-2.5%. Some mutual funds may charge you a fee upfront when you invest (entry load), or a deferred sales charge when you sell your shares (exit load). As a value investor, you should stay away from mutual funds with high fees and loads to avoid unnecessary costs.
What criteria to use to know how to select a mutual fund?
Examine the past performance of the fund. The past performance of a fund isn’t a guarantee of how well it will perform in the future. But it will give you an approximate idea about the returns and expectations. You should compare the funds’ past performance to the benchmark because it will give you a better idea of its actual performance. Stay focused on long-term performance (3 years or greater) and compare it with its competitors and index.
What else can you do?
Analyze portfolio and holdings. This may be a little tricky for new investors. The main question is how will you understand whether the holdings are good or bad? The key point is to make sure that the fund is investing in the type of securities in which you are interested. Analyzing the portfolio will give you a good idea if the fund is the right fit for you or not. There is also another trouble while analyzing the portfolio and holding. The portfolio can be changed from time to time. The manager may choose to buy or sell securities because the managers are independent. And if you are not regularly reviewing the fund, the current allocation might be a little different from the time when you invested in the fund. That’s why you should always review your fund every six months after purchasing to confirm that fund achieves your goals.
Check your fund manager. The fund manager is the one who makes all the major buy/sell choices on your behalf. That’s why you have to find out more about the fund manager. Find how long this fund manager is handling the fund. Check if the fund manager has other funds for managing. If the other funds are also doing alike good, then it is a good sign. But if just one fund is performing well, while the other funds are struggling, then it might be a problem.
Check the credentials of the fund house. You do not want to get involved with a troublesome fund house which might bring you problems.
The procedure to select the right mutual funds to invest requires a careful study of the fund. To whom you can trust? Better make your own decisions based on examinations.
And a very important note: Do not rush with investing. There are hundreds of mutual funds in the market. Take your time to analyze them and find out the one that best suits your goals.