One of the best ways to invest in the stock market is through mutual funds. However, identifying good mutual fund for long term investment is not easy. Several financial web sites, blogs, financial advisors indicate various parameters to rate the mutual funds. However, some of the basic parameters indicated below will help you choose the correct mutual funds for you.
Steps to single out best performing mutual funds:
1) Invest based on risk appetite: You should choose a mutual fund based on your risk appetite.
- High risk appetite individuals can invest in predominantly equity oriented funds- large cap/diversified funds, mid-cap/small cap funds, sector funds, etc. These are high risk mutual funds, but provide high returns if invested in the long run.
- Medium risk appetite individuals can invest in large cap funds, hybrid funds, debt funds etc.
Low risk appetite individuals can invest in hybrid funds and debt funds.
Hence, the primary criteria for choosing mutual funds does not depend on whether a fund is good or not, but it depends on your risk profile.
2) Invest for long term: Investment in mutual funds should be invested for long term purpose. You should invest that part of your money in mutual funds which you do not need for next 8 to 10 years.
3) Choose a fund which is consistently performing well: Investors generally jump and invest in funds which are just opened for subscription or which have provided good returns in last 1 year ignoring past performance. However, you should select mutual funds which are consistently performing for more than 5 years. When I say consistent performers, it’s a mutual fund out performing its benchmark index or its peer funds.
4) Invest in a mutual fund where AUM > Rs 100 Crores: AUM is the value of investments in a mutual fund scheme. Assets Under Management (AUM) indicate how well the mutual fund scheme is trusted by investors. Higher AUM indicates that more and more investors are investing in such schemes and lower indicates that investors are ignoring/avoiding such schemes. New mutual funds would have lesser AUM as they are yet to prove in the stock market and yet to be gain investors trust.
5) Do a basic check on the Fund Manager: Your money will be in the hands of the fund manager managing the mutual fund scheme. Do a basic check on the experience, background and reputation of the fund manager. An experienced and reputed fund manager will be more capable of managing your money and ensure better returns.
6) Invest in top rated funds: Most of the mutual funds are generally rated by CRISIL or Value Research Online. CRISIL rates on a scale of Rank-1 (good) to Rank-5 (worst). Similarly Value Research rates, mutual funds on 1-Star (worst) to 5-Star (good). If you can view these ratings for a mutual fund scheme and select, it could be a winning mutual fund.
7) For sector funds, analyse how well is sector doing: If you are planning to invest in the sector based funds like Banking, Pharma, Infrastructure, Technology, FMCG etc. you should first analyse the sector’s current performance and future outlook over the next 3 to 5 years. For example I feel that the new government will focus on infrastructure development and there could be good credit off take as the economy recovers. Hence Infrastructure and Banking sector are expected to do well in next 3 to 5 years.
HAPPY INVESTING ….. 🙂