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10 things to keep in mind while choosing a mutual fund to invest in 2023


A mutual fund investment is one of the best options on the market for long-term investments, but in order to build a significant corpus, you must be familiar with the numerous key aspects of mutual funds before making any investments. Based on the assets they invest in, there are over ten distinct types of mutual fund categories. Each category of mutual funds has a particular risk profile, investment horizon, benchmark index, stock and sector holdings, expense ratio, and investment objective. Considering all of these key facts, it is crucial to keep certain factors in mind while picking a mutual fund to invest in. Based on an interview with CA Manish P Hingar, Founder at Fintoo, the spokesperson said with over 40+ mutual fund houses and thousands of schemes available, it becomes a daunting task to choose the right mutual fund scheme to invest in. Here are 10 points to keep in mind before selecting mutual funds for your investments in 2023.

1. Investment objective: Choose a mutual fund that aligns with your investment goals and risk tolerance. If your investment horizon is long-term, then it is suggested to choose equity mutual funds as they provide the benefit of compounding over the long term, and for short-term investments, debt or hybrid mutual funds can be a prudent choice.

2. Expense ratio: It is advised to look for a mutual fund with a low expense ratio, as this will reduce the impact of fees on your returns.

3. Performance history: Consider the mutual fund's past performance, but keep in mind that past performance is not necessarily indicative of future results. While analyzing returns, it is suggested to look at returns for different tenures such as 1 year, 3 years, 5 years, and 10 years which will give an idea about consistency in the performance of the fund. It is further recommended to select funds that have consistently outperformed their respective benchmark and category average.

4. Diversification: Your mutual fund investment should not be limited to selecting only one scheme. It is advised that an investor should invest in different types of mutual fund schemes to diversify across asset classes and sectors.

5. Investment style: Consider whether you prefer an actively-managed or passively-managed mutual fund. Actively-managed funds are managed by professionals who try to outperform the market, while passively-managed funds track a market index. The global data on active vs. passive funds shows that the win-loss ratio of about 1:2 i.e., about 66% of actively managed funds have underperformed the index funds. In India, this ratio seems to be more 1:1 if we take the last three years' data. It comes very close to the 1:2 ratio if we take the data from the previous four years.

6. Fund manager: Research the mutual fund's fund manager and their track record to determine their expertise and investment style. The efficiency of a fund manager can be gauged by looking at the consistency in the performance of the mutual fund schemes, how much alpha the fund manager is able to generate over its benchmark and category average, and how well they have survived in bear phases of the market.

7. Fund size: Consider the size of the mutual fund, as larger funds may have economies of scale that can lead to lower expenses.

8. Liquidity: Choose a mutual fund that offers liquidity, meaning you can easily buy and sell shares as needed. As most mutual fund schemes are open-ended, schemes such as ELSS and FMPs come with certain lock-in periods. It is suggested to consider liquidity needs and investment horizon before planning to invest in options such as ELSS or Fixed Maturity Plans.

9. Risk Measure: As risk and return are two sides of the same coin, it is suggested to look at the scheme's risk measures, such as Standard Deviation and Beta, which measure the volatility of the scheme. In addition, ratios such as Sharpe ratio, Treynor Ratio, and Sortino ratio give a better picture of risk-adjusted returns.

10: Tax implications: Mutual funds are subject to capital gains tax. So make sure you consider the tax implications before investing. As equity mutual funds are held for more than a year and taxed at 10% along with the exemption of 1 lakh, they are considered tax efficient. On the other hand, debt mutual funds are taxed at 20% with the benefit of indexation only if it is held for more than 3 years. In case you hold your debt funds for less than 3 years, you will be taxed as per your applicable slab rate.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.