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| Mutual fund is the best investment tool for the
retail investor as it offers the twin benefits of good returns and
safety as compared with other avenues such as bank deposits or stock
investing. Having looked at the various types of mutual funds, one
has to now go about selecting a fund suiting your requirements. Choose
the wrong fund and you would have been better off keeping money in
a bank fixed deposit. Keep in mind the points listed below and you
could at least marginalise your investment risk. |
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| Past performance |
| While past performance is not an indicator of the
future it does throw some light on the investment philosophies of
the fund, how it has performed in the past and the kind of returns
it is offering to the investor over a period of time. Also check out
the two-year and one-year returns for consistency. How did these funds
perform in the bull and bear markets of the immediate past? Tracking
the performance in the bear market is particularly important because
the true test of a portfolio is often revealed in how little it falls
in a bad market. |
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| Know your fund manager |
| The success of a fund to a great extent depends
on the fund manager. The same fund managers manage most successful
funds. Ask before investing, has the fund manager or strategy changed
recently? For instance, the portfolio manager who generated the fund's
successful performance may no longer be managing the fund. |
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| Does it suit your risk profile? |
| Certain sector-specific schemes come with a high-risk
high-return tag. Such plans are suspect to crashes in case the industry
loses the marketmen's fancy. If the investor is totally risk averse
he can opt for pure debt schemes with little or no risk. Most prefer
the balanced schemes which invest in the equity and debt markets.
Growth and pure equity plans give greater returns than pure debt plans
but their risk is higher. |
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| Read the prospectus |
| The prospectus says a lot about the fund. A reading
of the fund's prospectus is a must to learn about its investment strategy
and the risk that it will expose you to. Funds with higher rates of
return may take risks that are beyond your comfort level and are inconsistent
with your financial goals. But remember that all funds carry some
level of risk. Just because a fund invests in government or corporate
bonds does not mean it does not have significant risk. Thinking about
your long-term investment strategies and tolerance for risk can help
you decide what type of fund is best suited for you. |
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| How will the fund affect the diversification
of your portfolio? |
| When choosing a mutual fund, you should consider
how your interest in that fund affects the overall diversification
of your investment portfolio. Maintaining a diversified and balanced
portfolio is key to maintaining an acceptable level of risk. |
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| What it costs you? |
A fund with high costs must perform better than
a low-cost fund to generate the same returns for you. Even small differences
in fees can translate into large differences in returns over time.
Finally, don't pick a fund simply because it has shown a spurt in
value in the current rally. Ferret out information of a fund for atleast
three years. The one thing to remember while investing in equity funds
is that it makes no sense to get in and out of a fund with each turn
of the market. Like stocks, the right equity mutual fund will pay
off big -- if you have the patience. Similarly, it makes little sense
to hold on to a fund that lags behind the total market year after
year. |
