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Arwind Sharma a passionate writer on finance and closely associated with financial companies. He is still busy in discovering time-efficient finance schemes.
Arwind Sharma | financeaffairs

Smart investing: A guide to choosing the perfect Mutual Fund

Dec 23rd 2015 at 4:54 AM

Wealth creation is an important goal for the average Indian today.

You’ve probably realised the importance of investments in this process already. You cannot amass wealth by just depending on your income. From fixed deposits to real estate, there are a number of ways that you could choose to invest your money and generate wealth from it. Of these, one of the fastest ways is through mutual funds. The risk of losing money is significantly low because the mutual funds market is one of the most regulated markets in the industry. So the chances of you being taken for a ride are almost nil. Now that you know the benefits, you need to choose from among the best mutual funds in the country. So how do you make this choice?

Here are the things you must consider before settling on a mutual fund to invest in.

1. Investment goals Mutual funds can be separated into a number of categories on the basis of investment objective. For instance, equity based mutual funds appreciate over a longer period of time and are riskier than other kinds of funds. They are also some of the best tax saving mutual funds in the market. These are better suited to younger investors with a fair understanding of how mutual funds work. Then there are the income and debt based ones, which have lower risks but also lower possibilities of capital appreciation, and they are called so because people who invest in these funds are looking for a steady source of income. Balanced funds offer a mix of safety and capital appreciation, while liquidity schemes are best suited for those who need to liquefy their assets quickly.

2. Expense ratio The expense ratio gives you the total percentage of assets that are being used to manage the fund’s expenses. The higher the ratio, the lower your returns. Moreover, lower expenses work out better for the long-term investor as well, because mutual funds will grow. With their growth, their expenses will also increase, which means that the returns will not keep pace with the growth of the fund.

3. Fund manager Having a good fund manager is crucial, because they are in charge of all the major decisions regarding the funds, and also responsible for diversifying your portfolio. When considering mutual funds for investments, check if the manager has delivered results with his earlier funds that are good when compared with the market situation at that time. The funds should not have given a mix of unusually high and low results. Additionally, too high a turnover means that investors would not have been able to save on taxes that year, so that’s a big disadvantage.

4. Risk vs. return Risky mutual funds can go either way- big rewards or poor returns. But if your funds consistently fail to give you the returns you expect, then it’s a bad idea to continue investing in it. Excess return is one of the parameters than makes investing in a risky equity based mutual fund worth it.

The returns you get must eventually work out to be worth the risks you are taking, because otherwise you’ll only end up losing money. To know the risk vs.returns ratio of the mutual funds you care considering, look at the Sharpe ratio, which lets you know how much excess returns the fund gives as compared to a risk free one. The higher the value, the better the fund, and the more tax benefits you get. Keep these things in mind, and you’ll be able to choose a mutual fund that gives you the best returns and helps you save tax at the same time. Get investing!

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