How To Select The Right Mutual Fund And Get Rich?
Updated: Jan 24
First, let me clear the myth that there’s no such thing as “best mutual fund” rather “right mutual fund “ is what you should look for.
Investing in mutual fund can be understood by using this analogy. Suppose you want to travel to a destination, so the first question that comes to your mind is “Which mode of transport should you choose?” Whether you should go by a train, Flight or hire a cab. Well, it depends, how far is your destination and by what time you want to reach the destination. Like, if you are travelling to a different country than flight might be more convenient and if it’s for a shorter distance than hiring a cab would sound more convenient.
Likewise, while selecting mutual funds you should have a financial goal in mind. Whether, you are investing for buying a new car, finance your further studies, for marriage or maybe accumulate wealth to start your own company someday.
Whatever be the reason for Investing, these parameters will help you grow your wealth exponentially.
1. Draw out your Financial goals and risk tolerance : The mutual fund industry was started back in 1963 with the formation of Unit Trust Of India but the momentum didn’t built up at that time. The cult of mutual fund started from 1993-2003 when private players entered into the mutual fund industry. And from then on there’s no looking back. Today, as an investor, you'll have upwards of 5000 mutual funds from a plethora of fund management companies to choose from, so you need to ask few questions to filter out the mutual funds schemes that are not useful for you.
· Are you looking for a steady income or capital appreciation?
· Are your goals in the near future or in the long term?
On the basis of risk tolerance, you need to decide where do you stand in the risk continuum.
· Can you withstand a portfolio that is volatile in nature, or
· You are comfortable in a conservative portfolio.
You should also look at the time horizon for which you are investing your funds. Generally, shorter period funds have a high sales charge compared to long term funds. A time horizon of 5-7 years is able to cover maximum market volatility and the sales charge is also less compared to short term fund.
2. Look out for expense ratio, It can make it or break it : It takes money to run a mutual fund. Expenses that of fund manager fees, analysts salary, electricity, coffee, office leases just to highlight few. These expenses need to be taken care of before investing your cash. The portion of total cash or assets that is being used to meet these expenses is called expense ratio.
Therefore, it is a no brainer proposition that a fund having expense ratio at minimal level should be considered. Even 1% difference between two funds in expense ratio could lead to major wealth difference in the long run.
3. Go For Diversification : It’s always advisable to diversify when you don’t know much about investing and businesses.
Diversification is the key to minimise your risk at the time of volatility. Simply investing in different mutual funds that invest in FMCG sector is not diversification.
These are few rough guidelines for diversification:
· Avoid sectoral or industry focused bets. Going all-in financial sectoral, FMCG sector etc can prove to be risky because any cyclical volatility in the sector will lead to fund erosion.
· Think beyond equity, investing in bonds, gold, FD’s and debt schemes can diversify away a lot of risk.
· Don’t go for only one mutual fund company, as companies have internal issues, ethics and non-compliances. So, investing through different fund houses will mitigate such risk.
4. Exit Load And Direct/ Regular : People often tend to ignore the exit load of a fund. Exit load is an expense that is being charged while opting out from the scheme before a specified time limit by the investor. Investing for long term often rules out such charges.
Direct or regular? What is the difference?
It's advisable that you go for direct funds as you save a lot money in the name of advisory services.
5. Past Performance : It is indeed very necessary to choose a fund that is doing well since inception or from a long time. It depends a lot on the management that is running the fund. So, before investing in any fund, do look out for the investment philosophy and objective of the fund manager. You can also track the past performances of the fund in the mutual fund website itself.
Investing is a long term game, what I called as “Lambe Race the Ghowra” You shouldn’t invest to make quick bucks rather build your wealth in the long term. And, for the people in the age bracket of 22-35 years should keep their major chunk of investment in equity and equity related products as equity helps to compound your wealth over time.
But, as an retiree you shouldn’t go all-in equity, higher equity return comes with a certain risk and you don’t want to erode all your retirement portfolio.
By this time I am sure you got a rough idea how to select the right mutual fund. So, Don’t wait until tomorrow, Start Investing now.