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Mastering mutual fund selection: Key factors to consider before investing

Opting for higher-risk funds requires longer investment horizons and higher risk tolerance to offset volatility
03:12 PM Jun 03, 2024 IST | GK Web Desk
mastering mutual fund selection  key factors to consider before investing
Mutual funds

Mastering the process of selecting suitable mutual funds requires careful evaluation of various key factors. From setting clear financial goals to thoroughly analysing the risk-return profile and expenses of potential investment options, there are multiple aspects an investor must examine before committing funds.


Goal-based fund selection


 It is important to set clear financial goals before choosing mutual funds. This helps pick the right type of funds. Short-term goals of 1-3 years are best met through safer debt funds. Goals of 3-5 years require balanced funds with a mix of debt and stocks. Long-term goals over 7 years suit equity funds for higher returns, though they involve greater risk.


Evaluating fund performance


It is important to properly assess a fund's past performance before investing. Key things to check include returns over different periods, performance in up and down markets, and risk-adjusted returns. Also, check the fund manager's track record and experience. Compare the fund's performance to its benchmark index. These tools help in understanding if the fund has consistently performed well versus peers and indices over time.


Analysing fund expenses


It is important to carefully scrutinise the different fees charged by a mutual fund. A key expense is the expense ratio, which is the yearly fee deducted for fund management. It is represented as a percentage of assets under management. Higher expense ratios can significantly dent your returns over the long run. For wealth creation goals, it is wise to opt for funds with lower expense ratios. This allows maximum investment returns to compound over the years for better long-term financial results.


Assessing risk profile

It is important to thoroughly assess the risk profile of mutual funds before investing. A fund's risk depends on the type of securities and investment strategy it follows. Opting for higher-risk funds requires longer investment horizons and higher risk tolerance to offset volatility. Balancing aggressive growth-oriented schemes for distant goals and conservative schemes for the near term allows the construction of a portfolio as per one's goals and capacity to take risks. This ensures suitable options for both long-term wealth creation and stability for short-medium duration requirements.

Building a portfolio

It is important to build a well-diversified mutual fund portfolio to maximise returns and mitigate risks. Investing across different market segments like large, mid and small-cap stocks, various categories like equity, debt and international funds, and across fund houses helps achieve diversification. Regularly rebalancing the portfolio is also crucial to maintain the desired asset allocation as per risk profile and goals. Rebalancing ensures the portfolio remains on track over the long term during market ups and downs. Proper diversification and periodic rebalancing aid in growing wealth in a planned manner meeting one's diverse financial objectives.


 Mastering the art of choosing suitable mutual funds necessitates diligently examining various crucial factors. From setting clear goals to comprehensively assessing aspects like past performance, expenses, and risk profiles and building a well-diversified portfolio through regular SIPs in different types of mutual funds, an investor must thoroughly analyse potential investment options.