6 things to consider before choosing a mutual fund to invest in

When you make the decision to invest in mutual funds, you will realise that there are an overwhelming number of options out there. To make a decision that helps you meet your financial goals and build an investment portfolio that is strategic, here are some things you should consider when choosing a mutual fund investment.

  1. Mutual fund type

Mutual funds are broadly categorised into equity, debt, and hybrid funds. Then there is further categorisation under these three categories based on the asset allocation, investment horizon, risk-return profile, and more. Hence, before you choose a mutual fund investment, make sure you are clear on the type of mutual fund. For instance, if it is a large-cap equity fund, an ultra-short-term debt fund, an index fund, a thematic fund, etc.

  1. Investment objective

Each mutual fund scheme is launched with a specific investment objective in place. You need to check this investment objective and make sure it aligns with your financial goal. Equity funds usually have the investment objective of long-term capital appreciation while debt funds usually focus on capital protection by offering safe avenues for short-term savings.

  1. Risk level and investment horizon

You will find information regarding the risk level and recommended investment horizon for every mutual fund scheme out there. You can consider this information and see if it aligns with your risk tolerance as an investor and the needed time period for meeting your financial goals. For instance, if your goal is to save for retirement and you have over twenty years to go, you can consider investing in an equity mutual fund with a high risk level and recommended investment horizon of 15+ years.

  1. Asset allocation

Another thing to check before you invest in mutual funds is the portfolio and the asset allocation of the fund. For instance, an equity fund’s portfolio will show you the companies and industries across which the fund has invested in percentage form. It will also show you the top holdings of the fund so that you can see the type of diversification the fund offers, and if the holdings overlap with your other investments.

  1. Past performance

Each mutual fund scheme has data on its past performance available including one-year, three-year, and five-year returns. You can also see how the scheme has performed in comparison with its benchmark index to understand its performance compared to the overall market’s performance during the same period. While you look at a scheme’s past performance, it’s also important to remember that past performance is not always a reliable indicator or guarantee of the scheme’s future performance.

  1. Expense ratio

The cost of investing in a mutual fund can be assessed from its Total Expense Ratio (TER). This is the fee that the mutual fund house or Asset Management Company (AMC) charges for managing and running the mutual fund scheme. The lower the expense ratio, the better it is for you as an investor. This is because a high expense ratio can eat into your returns over the long term. When you invest in direct mutual fund schemes through the AMC, the expense ratio is lower as compared to the regular plans for the same fund that you invest in through a broker or agent.

Some other things to look at are the mutual fund manager and their experience, the exit load, and ratios such as beta and standard deviation. Once you decide on the mutual fund you want to invest in, you can either invest in it through a one-time lump sum investment or a Systematic Investment Plan (SIP). SIP investments in mutual funds help you meet long-term goals by saving small amounts of money regularly.