How to Pick the Best Equity Mutual Fund?
Choosing the right equity Mutual Fund from a large pool of available equity schemes is perhaps the most crucial aspect of your equity MF investment. To begin with, you need to be clear on factors such as past performance of the scheme, how it compares with peers and the benchmark, the volatility measures and risk adjusted performance of the scheme, scheme size, and expense ratio of the scheme and so on.
Here are some pointers to guide you to pick the right equity MF
Before you start investing, you need to identify whether the need of the investment is short-term, which could be needed for say the down payment of a car, or long-term (retirement planning or for children’s education or wedding). Also, a lot depends on the extent of risk an investor is willing to undertake and the performance of a scheme over a period of time.
Picking the right fund house:
Do some research and identify fund houses that have a strong presence in the financial world, making them most probable candidates for providing funds that have a reasonably long and consistent track record. Experts argue that when it comes to fund houses, a strong parentage ensures efficient processes and the capability to build a strong business.
The idea is to get a fair assessment of the performance of fund over a period of time. An equity fund could give you over 100% returns at a time when the equity markets were witnessing a bull run, but the same fund might witness a drop in net asset value (NAV) when the markets were volatile. Instead of advising in such funds, it is advisable to look for funds that consistently outperform its benchmark over 3-5 years.
Weigh your options: Risk versus returns
An investment in securities inadvertently comes with certain risks, and for obvious reasons, if returns are not in proportion to the risks taken then the investment is not worth it. A good mutual fund is one which gives better returns than others for the same kind of risk taken. Some indicators of the performance of the MF should used to assess them. These are Sharpe Ratio, which is excess return given by the fund over return given by a risk-free instrument divided by a statistical term called Standard Deviation, which tells how volatile the returns of the fund have been over a period.
Know more about your fund manager:
Do not underestimate the importance of an efficient fund manager. Go through the performance of funds managed by him, especially during periods when markets went through difficult times. An investor should try to find out if a fund manager has expertise over different investment categories, and should gain from it.
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