Mutual funds are investment tools that gather the funds provided by investors with similar investment objectives. A fund manager manages these accumulated funds. The fund manager will search the stock market for different investment instruments like stocks, bonds, etc. and allocate the pooled funds towards these instruments. Mutual funds provide investors the access to professionally managed portfolios at an affordable price.
A mutual fund's value will depend on the performance of the security the fund has decided to buy. When you buy a unit or a mutual fund, you are purchasing the portfolio's performance or a part of the portfolio's value. If you are opting for a mutual fund plan, you must thoroughly research its performance and see if it fits your investment objective. Mutual funds have different types like index funds, debt funds, balanced funds, fixed-income funds, money market funds etc.
To choose the correct mutual fund for you, you can follow the steps listed below:
An excellent mutual fund investment can be identified by its ability to produce exceptional returns. Consistent returns over some time can be a good indicator of a well-performing mutual fund.
2. Performance against benchmark:
A mutual fund scheme's benchmark index is the standard against which the mutual fund's performance and stock allocation are compared. The allocation of a benchmark index should go with the financial objective of a scheme.
3. Performance against category:
To assess a mutual fund scheme through its performance, you must compare it with its active peer group. When you compare the mutual fund with its peers, you will understand the fund's performance much better. However, the comparison should be restricted to the same type of mutual fund schemes.
4. AMC track record:
AMC (Asset Management Company) is the company which manages the mutual fund scheme. The AMC will make decisions pertaining to the performance of the mutual fund. The AMC handles the stock selection for the fund as well. Hence, it is essential to check the AMC's track record in the stock market when selecting a mutual fund.
5. Expense ratio:
A mutual fund's expense ratio will provide information on the fees charged by an AMC for managing, promoting, and distributing a mutual fund scheme. It will include expenses incurred in running a fund and will be included in the figure. Generally, if a mutual fund has a low expense ratio, the mutual fund plan's net returns will be high.
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