As the value of mutual funds (MF) vary with market fluctuations, the return on capital invested also fluctuates widely especially in short term. Higher the risk, higher will be the fluctuations and hence it is advisable to study the funds before you choose one. Hence, for a novice investor, who is looking to enter the equity segment, choosing the best fund is the first challenge before negotiating the stock market turmoil.
So, what you should do to find that best fund to enjoy superior equity returns and get advantage of the power of equity?
As MF documents come with statutory warning that mutual fund investments are subject to market risks, you should first read the offer documents carefully to determine that the particular fund meets your investment goals or not. To do that, you have to do your financial planning first to determine the financial goals, which involves finding out how much money needed after how many years to fulfills the goals.
These will help you in deciding where to invest and how much risks you may have to take to reach the goals. Shorter the duration of investment, more conservative the fund should be and vice versa.
So, once you determined the types of funds (like liquid fund, short term debt fund, balanced fund or equity fund) you need to fulfill various financial goals, you may choose funds from respective categories.
But again, how to choose the best fund from a particular category – should it be the fund on the top of the performance table?
But careful, MFs investment also come with another warning – Past Performance is Not Indicative of Future Results. So, what to do?
If you are entering out of greed in a overheated market, choosing the top performing fund will be nothing but picking the most risky one. You may soon find the fund at bottom of the performance table when the overdue correction eventually takes place.
However, if you are entering the market in down cycle with proper financial planning, you may rely on the the performance table as the fund with risks well managed would be up on the table in a down market. But do some deep study on the basis of different categories of funds.
For example, in case of debt funds, where returns of various funds are almost identical, managing risk is most crucial than focusing on generating returns. So, check the experience and track record of fund managers in managing debt funds.
In case of equity funds, instead of going by recent performance, check consistency in performance of the fund in long run – say in 10-15 years, along with experience of fund managers and for how long they are managing the fund.
So, there is no best fund in general, but for an investor, the best fund will be the most suitable one to achieve his/her financial goals.
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Source: Financial Express