HOW TO SELECT A MUTUAL FUND?

how to select a mutual fund

Written by Aryan Agarwal

August 18, 2020

Everybody wants to have a good income and a place where they can invest his savings and will get good returns.

That’s why some people put their money in the bank so that they can get fixed income.

Some people make Fixed Deposits,

Some invest in gold or the stock market,

and while some are confused about where to invest their savings.

So here it is the best option for you all – MUTUAL FUNDS.

How many of you’d invested in mutual funds?

I’m sure the number will be low.

Do you question yourself why you had not invested in mutual funds? Simply because

  • You get scared
  • You don’t have the correct information.
  • Do you think that it is just another scheme that will collect money and eventually will defraud you?

But let me tell you that mutual fund is 100% safe because it is regulated by the Securities and Exchange Board of India (SEBI) or any other regulatory agency in your country.

There is nothing to get scared.

You just have to play smartly.

So now, let’s understand what mutual funds are?

How to invest in a mutual fund?

And, most importantly, how to select a mutual fund?

What is a Mutual Fund?

The meaning of mutual fund is as its name suggests that ‘mutual’ means mutually some people invest in a fund that is further managed by professionals of an asset management company.

What that professionals do is that they safely invest your money in the stock market. After getting returns, they keep 2 or 3 % with themselves as a fee, and the remaining profit is all yours.

People who don’t know how to invest in the stock market don’t invest there. Still, they can invest in mutual funds so that highly qualified professionals can invest their money in the stock market and quickly get high returns.

So, the mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio.

One of the most famous mutual funds in the investment universe is Fidelity Investments’ Magellan Fund (FMAGX). 

Under Lynch’s tenure, Magellan’s assets under management increased from $18 million to $14 billion.

Even after Lynch left, Fidelity’s performance continued strong, and assets under management (AUM) grew to nearly $110 billion in 2000, making it the largest fund in the world.

DIVERSIFICATION, or the mixing of investments and assets within a portfolio to reduce risk, is one of the significant advantages of investing in mutual funds.

Experts advocate diversification as a way of enhancing a portfolio’s returns while reducing its risk.

DIWORSIFICATION—a play on words—is an investment or portfolio strategy that implies too much complexity and can lead to worse results.

Many mutual fund investors tend to overcomplicate matters. That is, they acquire too many funds that are highly related and, as a result, don’t get the risk-reducing benefits of diversification. 

So now, let us understand the types of mutual funds before going into how to invest and select a mutual fund.

TYPES OF MUTUAL FUNDS

There are three types of mutual funds.

EQUITY FUNDS 

These are invested in the equity stock market. 

They possess high risk and high return.

Because you win some when you lose some.

Within this group, there are various subcategories.

Some equity funds are named for the size of the companies they invest in: small, mid, or large-cap.

DEBT FUNDS

It centers around companies and investments that pay a set rate of return, for example, government bonds, corporate bonds, or other debt instruments.

The thought is that the fund portfolio produces interest income, which is, at that point, gives to the investors. They possess less risk, and therefore, you will get low returns.

BALANCED FUNDS

In these funds, some part of the cash is put resources into equity assets and some part in the debt assets.

So your risk will be adjusted, and you will get an acceptable benefit.

You don’t need to be a specialist to accomplish sufficient investment returns. Yet, on the off chance that you aren’t, you should know your limitations.

Concentrate on the future profitability of the advantage you are thinking about.

If you don’t feel comfortable making a rough estimate of the asset’s future earnings, simply overlook it and proceed forward.

In these kinds of assets, the huge preferred position is that you will get a decent risk factor.

The goal is to diminish the risk of exposure across resource classes. This sort of fund is otherwise called an asset allocator fund.

There are also two significant kinds of assets dependent on taking capital out.

  • OPEN-ENDED FUNDS

Open-end funds are exchanged now and again, directed by fund managers during the day.

There is no restriction on what number of offers an open-end fund can offer, which means stocks are unlimited.

Stocks will be given as long as there’s a hunger for the fund.

So when financial specialists purchase new stocks, the fund company makes new, replacement ones.

  • CLOSE ENDED FUNDS

A closed-end fund is overseen by an investment or fund manager.

It is composed similarly to a publicly-traded company.

This sort of fund offers a fixed number of stocks through an investment organization, raising capital by putting out the first sale of stock (IPO).

Closed-end funds can be traded at any time of the day when the market is open. They can’t take on new capital once they have started working.

Now the question arises,

HOW TO INVEST IN A MUTUAL FUND?

how to select a mutual fund

All you need to do is first save your six-month money from your savings as an emergency fund.

Do whatever you want to do from that. Invest in fixed deposits, gold, savings account, and many more.

Now what to do with remaining savings?

You don’t need a DEMAT account to invest in mutual funds.

You can start with 1000 rupees per month through SIP, i.e., Systematic Investment Plan. There is no high risk. You can quickly get a 10% or 20% yearly growth return.

All you have to do is to go to a bank’s website or asset management company’s website and get e-KYC done from there.

You can also invest in mutual funds using apps like Zerodha and Groww, which allow investing easily.

You can easily invest that in mutual funds through SIP.

It is a systematic investment plan, in which you fix some amount to invest regularly on a monthly basis.

It is an excellent option.

Never try to get into stocks directly if you don’t have in-depth knowledge of the stock market.

But If you are qualified in that or that is your work daily, then it is ok. 

But if you had heard some story or advice that earlier that stock was let’s say 100 and now it is 500, never go for that.

Because you never know when what will happen with a company.

The example, you had collected 1,00,000 rupees and invested in stock on someone’s advice. After some time, that company got insolvent that you will left only with 10,000 rupees in your hand.

That’s why it is said that never put all your eggs in the same basket.

“Never invest in anything that you don’t understand properly”- Warren Buffet.

 Hence, deep dive into the industry, its workings, relationship, or dependence on global or economic factors along with the company’s background.

HOW TO SELECT A MUTUAL FUNDS?

There are 1000’s of mutual funds.

Start with a large CAP equity fund.

Check the rating of it through money control, value research, and many more websites. It should be 4 or 5.

Never go for that which has 1, 2 or 3. 

Instead, it should be a fund that has a rating of 4 on five on all websites.

Now what you had done was you had fixed a monthly amount that could be anything like one thousand, two thousand, five thousand, or anything you want.

Through SIP, automatically, your amount will get deducted from your account every month over the next ten years, 20 years, 30 years.

Now you would be wondering why is it a smart investment?

Because your money is not getting unnecessary deducted, the money that you are giving is investing wholly as it is.

There are also two options. 

One, you can go through your broker, and the other one is you can go directly.

And the benefit of going directly is there you don’t have to pay a commission fee to your broker.

Firstly, your expense would be let’s say 2 %, but in a second way, it will be 1% or less only.

It sounds a small percentage, but over 20 to 30 years, it will be an extremely big amount because of something known as compound interest.

“Decision making” takes tames, but only that will decide what would be your account in future- in lakhs or crores.

Now Why mutual funds and why not stocks?

Because in stocks, you will invest in 4 to 5 stocks, but in mutual funds, your money will get divided into 50+ investments automatically.

If one company is getting bankrupted, then proportionately, your loss will be less. The example that bankrupted the company has only 2% of your investment, so even after that, you have 98% in your hand.

Why don’t people invest in mutual funds?

Because they have a fear of- what if their money will get lost because there is no limit of getting down in mutual funds, what it is in Fixed Deposits, that it will never come down, interest may get low. Still, your principal amount will be as it is invested. That’s why people consider it a safer option. 

People don’t get scared when money value comes up in mutual funds.

If they get the guarantee of like a fixed percentage will come to them every year, then they will invest their total savings.

But there is no guarantee. It can get down. 

Just imagine what if the mutual fund is getting down and even after you are getting benefits then?

Now your problem will be solved?

Right?

So here it is,

STRATEGY TO INVEST

Warren Buffett once said, “Only when you combine intellect with emotional discipline, you will get rational behavior.”

Value Investing follows the same principle.

Emotions can adversely impact investment related decisions.

Value investors do not get swept away by market sentiments but rather look at the actual value of a stock.

They also do not fall for the “growth trap” without understanding the history or intrinsic strength of the stocks.

The value investing approach is not for those who like to follow the crowd.

In his words, “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well”.

In the long run, only inherently stable stocks (with a high intrinsic value) are going to fill the coffers.

So as when the market goes down, everybody will leave mid-cap stocks, and at that time, you will stick to mid-cap stocks. So now if the market goes up, then it is your benefit, and if it comes down, then also it is your benefit.

If you do different from market society, only then will you get different?

Here are some other primary considerations which you will have to keep in mind while selecting a mutual fund.

Depending upon why you are investing in the given mutual fund, you will get it right.

IDENTIFY GOALS

For some investors, the principal investment objective is to gain capital appreciation on their investments; for others, it may be tax saving.

Depending on your goal, your fund selection will vary, so decide accordingly.

RISK FACTOR

If you want high risk,

  • For the short term (3 yrs.)-go for credit risk funds, hybrid funds
  • For mid-term (3-5 yrs.)- go for multi-cap funds
  • For long term (5 yrs. And above)-go for small and mid-cap funds
  • If you want medium risk,
  • For the short term (3 yrs.)- go for low duration funds
  • For mid-term (3-5 yrs.)- go for balanced advantage funds
  • For long term (5 yrs. And above)- go for multi-cap funds
  • If you want low risk,
  • For the short term (3 yrs.)- go for liquid funds
  • For mid-term (3-5 yrs.)- go for short duration funds
  • For long term (5 yrs. And above)- go for large-cap funds

LIQUIDITY INVOLVED

If the cash is required soon, it should not be put into equity mutual funds.

The cash that can be set aside for a sensibly long time without stressing a lot over the market good and bad times should just be put towards equity mutual funds.

FUND PERFORMANCE

Fund performance matters, yet not from a momentary viewpoint of 6 – a year or even a couple of years. It ought to be considered for a sensible timespan.

This is to guarantee that the store ventures have experienced various market cycles, and the profits have been steady.

If the reserve has not had the option to beat its benchmark more than three, five, seven, or ten years, it is sensible to accept that the fund probably won’t be a wise investment later on as well.

Likewise, It’s enticing to pass judgment on a mutual fund on ongoing returns. On the off chance that you need to pick a champ, see how well it’s ready for future achievement, not how it did previously.

FEES AND LOAD

It is basic to comprehend the various kinds of charges related to an investment before you make a buy.

It’s important to take a look at the MER, which can help clear up any disarray identifying with sales charges.

The expense ratio is simply the total percentage of fund assets that are being charged to cover fund expenses.

The higher the ratio, the lower the investor’s return will be at the end of the year. 

FUND MANAGER

Check who the fund manager is for the particular mutual fund.

A decent fund manager can turn the most exceedingly terrible performing mutual fund to the best performing fund.

The fund manager assumes a crucial job on how your mutual fund is performing, as he/she is the go-to person to settle on which stocks or securities to invest in and how to disperse the cash for a specific mutual fund.

If the fund manager is correct, at that point, that particular fund will progress nicely.

In any case, on the off chance that the fund manager isn’t unreasonably effective, at that point, the fund probably won’t play out that well later on.

Conclusion

Instead of chasing the illusion of the best mutual fund, the right investment approach is to look for the right fund as per your investment requirement.

And if we revolve our research around the fact that has been discussed above, then selecting the right fund is not a tedious task at all. 

how to select a mutual fund, how to invest in a mutual fund

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