Here is part 1 of an article I wrote for Money Mantra…
How to select a good mutual fund.
Selecting a mutual fund for investing is a very important step indeed. It is not just important it is crucial. However it is the second step, not the first.
It is surprising at the number of people I meet or hear from – they all have same questions. So when they ask me ‘How do we select a mutual fund?’ for me it is an amusing question. So like all self respecting advisors I start with the dreaded line- “Well, it depends…..’
Then I ask them – “What are your financial goals, if any?”. Now only if you have big long term goals does the choice of a mutual fund really matter. If you are investing for a short period of time – you are investing in say a liquid fund. It hardly matters in which liquid fund you invest – the performance gap between two liquid funds is not so high. Choose the liquid fund with a high AUM (assets under management) – and one which gives good service in terms of redemption on the phone or net, or such considerations.
However if you are looking for a longer term investment – which means you are looking to be invested for at least 8 to 10 years, you are looking to invest in equity mutual funds. This article is aimed at selecting a good equity mutual fund for a long term.
1. The most important first step is to have an investment goal. A fantastic fund selection done without having an investment goal is completely useless. You should know the reason for your investment, how long you can be in the investment, at what stage you will re-allocate, etc. before you make your first investment.
2. Your focus will lead to the correct asset allocation – the very important factor which will decide how much money you will put into an equity fund.
3. Do your homework: Buy large cap well diversified good quality funds. Do not buy opportunities funds, international funds, contra funds as a staple part of your portfolio.
4. All funds in India are no load funds – which means there is no sales cost. This is good and it means all your money gets invested. For a large cap equity fund, it may not make too much sense to pay somebody to pick the fund for you, try doing it yourself.
5. Have a demonic watch on the asset management charges. As a fund starts to do well, it should attract a lot of investors, and as its assets increase it should keep dropping its asset management charges. Look at well managed funds with charges below 1.9% p.a. – there are many.
6. Look at the portfolio turnover ratio – the greater the ratio, the more is your total cost. One cost which is not visible to the investor is the brokerage that the fund scheme pays. This is a function of the turnover of the portfolio. So a fund with a lower turnover would be incurring lesser costs.
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