When choosing a mutual fund, do not go by the current one-, three- or five-year returns alone and do not pick only those funds that have the highest returns
I want to invest in direct mutual fund schemes without taking the help of any agent or distributor. What are the parameters to assess whether a mutual fund scheme is good or not? I am 25 years old. I want to start by investing ₹5,000 per month and have no specific goals in mind as of now. Please suggest a scheme that is good for a beginner like me.
Assessing the quality of a mutual fund scheme involves a good amount of research and knowledge of both equity and debt markets. It is best that you use resources available online to understand how mutual funds and markets work since you want to do it on your own.
When choosing a mutual fund, do not go by the current one-, three- or five-year returns alone and do not pick only those funds that have the highest returns. Remember that returns change on a day-to-day basis and a fund that is at the top today may not be so tomorrow.
If you are investing in equity funds, look at returns across different market cycles. Returns only need to be consistently better than the index or peers. The fund you choose does not need to be a chart topper all the time. Next, look where the returns are coming from; in other words, what the fund’s strategy is and how it’s helping in terms of returns. This will help you understand the fund itself and know whether it will fit your risk level and time frame. Try to have a mix of strategies in your portfolio and accordingly choose the funds.
When investing in debt funds, it’s important to find out if the fund has exposure to papers rated below AA+ as the presence of such securities indicates credit risk. Avoid schemes with high credit risk, even if your time frame and risk appetite allows it. If you are choosing debt funds that take portfolio calls based on interest rate cycles (called duration strategy), ensure that your time frame is at least five years.
It’s also advisable to keep your time frame at least similar to the average portfolio maturity of the fund. You can hold for longer periods as well.
It is hard to suggest funds without knowing the risk capacity or time frame. If you have a long-term goal of six-seven years and are willing to take market fluctuations in your stride, you can go for an index fund built on the Nifty 100. For lower risk, you can consider balanced advantage funds like DSP Dynamic Asset Allocation.