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How to select best mutual fund schemes? Here is your checklist
Choosing the right mutual fund to invest in, is one of the most important steps in financial planning.
Mutual fund has become a popular investment choice due to its ease of investing and professional management. As investment goals vary from person to person – money for children’s education or marriage, house purchase, post-retirement expenses, etc – the investment products required to achieve these goals also vary.
In fact, choosing the right mutual fund to invest in, is one of the most important steps in financial planning. According to HDFC Mutual Fund, mutual fund schemes must be chosen carefully on the basis of parameters’ like - one's goals, time horizon, risk tolerance and overall financial plan.
In fact, based on these parameters every investor must follow an asset allocation plan. Once you know how much you need to invest across different asset classes such as equity and debt, you must choose funds that match your tenure.
HDFC Mutual Fund advises that if your goal is less than three years away, you should consider investing in a debt-oriented fund. For a medium-term goal, which is typically between 3 - 5 years, one can consider hybrid equity funds that have exposure to both equity and debt. For long-term goals, equity mutual funds offer a good option.
Some of the other important factors one should consider while choosing a mutual fund are -
History & Track Record of Fund House
Since decisions taken by the fund house and the fund manager may have a direct impact on your investment's performance and the realisation of your financial goals, it is important to do a check on the fund house, history of existence, track record across schemes before selecting a scheme.
Consistency in past performance
One shouldn’t select mutual funds only on the basis of their performance over a 6-months to 1-year period. Choose funds that have performed consistently and given steady returns over 3, 5 or 10 years.
Funds that have not just performed well when the markets are doing well, but the ones that remain steady even during a slump, are the ones to watch out for.
Investment strategy and objectives
One should read the scheme related documents thoroughly and understand the investment objective of the mutual fund scheme and know the kind of securities in which your money will be invested. Evaluate the objectives and see if they are in line with your risk profile and investment goals.
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Since mutual funds offer diversification across stocks, sectors, and asset classes, one can use these funds for diversifying portfolio. For instance, when you are investing in equity schemes, ensure that there is good spread of large-cap and mid-cap stocks in such schemes, and the fund has been consistent in performance for a minimum of three years.
In the case of a debt fund, choose a fund that matches your investment horizon. One should also take into account the fund manager's view on the direction of interest rates and the sensitivity of your fund towards interest rate movement.
Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.
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