How to Select Right Mutual Fund Scheme for You : Mutual funds are considered a better means of investment for retail investors. But this method of investment can be successful only when the mutual fund scheme is chosen well and with full wisdom. To select the right mutual fund, you should have all the necessary information about the schemes available in the market. For this, just doing online research is not enough. Reading the documents related to the scheme carefully can be very useful for you. If you do this, you will be able to take right decisions according to your risk profile and investment objective.
What to check in scheme documents
Scheme Information Document (SID) and Fact Sheets are essential documents to understand the strategies, objectives and risks associated with a mutual fund. This document can help you in taking the right decision. But for this you should know what things you have to focus on given in this document.
1. Fund Overview
The first part of the Scheme Information Document (SID) usually contains the Fund Overview, which details the investment strategy and objective of the fund. The investment objective of the fund states what is the main objective of the scheme? Long-Term Capital Growth, Regular Income, or Both? Along with this, it is also told whether it is a scheme with active management, in which investment decisions depend on the fund manager or it is a passive scheme that completely copies a benchmark index, which are usually called index funds.
2. Investment Strategy
Information about its investment strategy is also given in the documents related to the scheme. Under this, things like investment philosophy of the fund, sectors, asset classes and segments are given. Check how and in what proportion the fund will invest in equity, debt, or any other asset class. Similarly, some funds also focus on a particular theme like technology, healthcare, or infrastructure.
3. Minimum investment and SIP options
Investors should also check what options are available for investment in the scheme. What is the lump sum investment amount and how much can one start investing through Systematic Investment Plan (SIP).
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4. Risk Factor
There are some risk factors associated with every investment. For example, market risk related to fluctuations in market conditions and interest rate risk related to changes in interest rates, which have a greater impact on debt funds. Credit risk, which is particularly associated with investments in low-rated bonds. Similarly, liquidity risk is associated with assets with low liquidity. It is very important to check the risk factor so that you can choose the right fund as per your risk tolerance.
5. Asset Allocation
Information about how a fund invests its corpus by dividing it into different sectors, market segments, industries and geographical areas is given under Asset Allocation. For example, large cap funds invest in strong companies with big businesses, while small cap funds invest in stocks of emerging companies.
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6. Past Performance
To choose the right mutual fund scheme, it is also important to know the past performance history. Although this information is not available in case of New Fund Offer (NFO), but for existing schemes this data is very important. While looking at these figures, compare the returns of the scheme with the benchmark index and other schemes of the same category. In case of NFO, you can check the performance history of the fund manager of the new scheme by examining its past records.
7. Track record of the fund manager
The experience and track record of the fund manager affects the performance of the fund. Therefore it is important to look at his past record. This also includes the performance of other schemes managed by them. The fund manager should also have experience in fund management in different market conditions.
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8. Expense ratio
Expense ratio means the percentage of the total assets of the fund which is spent on management fees and other things. If the long-term returns of two schemes are similar, it is beneficial to invest in the fund with lower expense ratio.
9. Exit Load and Redemption
Entry and exit load should also be kept in mind in the scheme documents. Entry load is to be paid while investing in the scheme and while withdrawing money from the exit load scheme. Apart from this, one should also know about the redemption process of redeeming the units of the scheme i.e. selling them back to the fund house. For example, ELSS has a lock-in of 3 years, while some funds also have a lock-in of 5 years.
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10. Tax provisions
To know the net return from any fund, it is also important to know the tax provisions related to investment in it and their effects (Tax Implications). For example, 12.5% LTCG tax has to be paid on profits made after holding more than 12 months in equity funds, whereas there is no tax on profits up to Rs 1.25 lakh in a year. At the same time, tax exemption is available on investment in ELSS under Section 80C of the Income Tax Act. On the other hand, under the new rules, no matter how long the debt fund is held, tax has to be paid on it as per your income tax slab.
Overall, choosing the right scheme for investing in mutual funds is a big decision. Therefore, it is important to read and understand the documents related to the scheme thoroughly, so that you can take a decision only after knowing better the risks and possibilities related to investment.
