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How to Review a Mutual Fund in Just 5 Mins?

29 December 2021

The raging bull market in India, delivering phenomenal returns in the last 2 years, has made everyone curious. 

As people tip toe into the world of financial investments, an oft mentioned advice is “Mutual Funds Sahi Hai”. But as simple as the advice seems – reviewing mutual funds to figure out which is right for you can be tricky. This is considering the plethora of investment houses and their offerings. Here is a quick guide to help you decide which mutual funds to invest in. 

What is your investment objective? 

A simple way to narrow down your search, is to simply ask yourself – why am I investing in mutual funds? The reasons could vary from seeking a high rate of return on your savings, diversifying away from fixed deposits, saving up to a goal of retirement or marriage. This helps in determining your risk appetite. 

Which MF category?

There are broadly three categories of mutual funds – equity, debt and hybrid. 

Equity mutual funds invest in stocks of listed companies and are typically high risk-high reward investment vehicles. Debt mutual funds invest in fixed income securities including bonds issued by private and public sector companies. Hybrid mutual funds, as the name suggests, invest in a mix of equity and debt instruments. As you begin scanning through mutual fund options for investment, you will also come across other types of mutual funds including ELSS (Equity Linked Savings Schemes) for tax saving, or index funds that replicate market indexes such as the Nifty50. 

Based on your risk appetite and investment goals, you can narrow down your search to one category of mutual funds. 

What do the past returns look like? 

The logical next step is to look at the returns delivered by the mutual funds in the past and how they compare to the category average of returns. 

There are two important points to note here – one, past returns are not a definite indicator of future returns, and two, ensure that you are comparing apples to apples. This simply means that your return analysis should match your investment horizon. 

What is the expense ratio? 

The fund house charges a percentage on your investment as a fee for managing your money – this is called the expense ratio. Naturally, the lower the expense ratio, the better. If you invest ‘directly’ with the mutual fund, the expense ratio tends to be lower than ‘Regular’ plans where you invest via an investment advisor or broker. When compounded over several years, the impact of a lower expense ratio can be significant. 

What is the lock in period and Exit load? 

Another important aspect to note while reviewing mutual funds is the lock in period. For instance, ELSS have a lock in period of 3 years. These funds may be unsuitable if you aim to withdraw (or redeem) your investment in the next 1 year. This is where it all ties back to keeping your investment goal as the north star while reviewing mutual funds.

On the same lines, some funds may have an exit load – an additional fee to redeem your investments before a certain time frame. Low to zero exit load funds are usually preferable since they could give the flexibility to withdraw. 

What is the risk level? 

All returns have associated risks. One quick way to assess risk is to check for the consistency of returns. More experienced investors may also want to compare Sharpe ratios (Read what it means here) which are used to evaluate the risk-adjusted performance of a mutual fund. 

When done right, consistent investing in mutual funds is far more likely to yield high returns than cherry picking stocks at will for maximum returns. 

Now that platforms like Groww have made it easier than ever to invest, you can consider mutual funds in the broader scheme of your investment portfolio. 

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