How to Select the Right Mutual Fund? – 7 Tips for Mutual Fund Investing

Know about 7 big tips or techniques on How to Select the Right Mutual Fund.

Gone are the days of people being scared of investing in Mutual Funds. With time people have realized the benefits of investing in the right mutual funds.

For outsiders as well as professional investors selecting the right type of mutual funds can make or break the deal.

Selecting a mutual fund depends on several factors that one must realize before investing the capital.

How to Select the right Mutual Fund?

Here are the 7 tips that any investor must consider while selecting a proper Mutual Fund –

1. Set-up a Goal
2. Risk Assessment
3. Liquidity
4. Expense Ratio
5. Turnover Ratio
6. Fund Management
7. Diversification of Assets

Adopt these 7 techniques to choose the right mutual funds for investment.

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Set-up a Goal – 1st Tip to Select the right Mutual Fund

Before investing in Mutual Funds it is important to realize and set up realistic goals. These goals include the number of returns expected from the investment, long or short-term goals, and other aspects.

For example, one must figure out whether they need the money within a short time.

That is from six months up to two years, or in a long time which is generally five years to a decade.

Similarly, it is important to figure out the amount of returns expected from the investment.

If higher returns are expected it is best to invest in equity Mutual Funds. However, these can be risky.

Similarly, less risky yet moderate returns are something one can expect while investing in Debt Mutual Funds. Moreover, the reason for investing in Mutual Funds should be clear.

Some investors invest in mutual funds with the goal of getting capital returns from investment, whereas others invest in mutual funds to save taxes.

Depending upon the reason for investment mutual funds will be different for different investors.

Being clear about one’s goals as well as expectations from the investment is important before diving into mutual fund Investments.

Risk Assessment – 2nd Tip to Select the right Mutual Fund

Another key factor to pay attention to is the risk tolerance of a person. As an investor, it is important to do risk profiling.

Risk profiling is realizing the amount of risk that one can handle when investing in Mutual Funds.

A mutual fund is subject to market risks, therefore it is important to have an idea about how much risky investment can be.

When speaking in general, Mutual Funds are of two types, equity, and Debt Mutual Funds.

Equity Mutual Funds are highly risky and have several ups and down depending upon the market but offer great returns within a short time itself.

At the same time, Debt Mutual Funds are not much risky but are rather stable however they offer less return as compared to equity Mutual Funds.

One can choose the right type of mutual funds depending upon their risk profile.

The more aggressive Investors can opt for equity Mutual Funds that are more volatile whereas the more reserved investors can invest in debt mutual funds.

The market is an extremely volatile place therefore without proper risk profiling investing in Mutual Funds can lead to a very bad and often non-profitable experience.

Therefore realizing risk tolerance is of utmost importance.

Liquidity – 3rd Technique to Choose the right Mutual Fund

In finance market terms, liquidity means the ease of receiving the returns or of getting the money back as per need.

It is important to consider the liquidity of the money invested when investing in Mutual Funds.

If it is not liquid then it is not possible to get the money in the short term or as per the will of the investor.

Generally, in equity mutual funds, investment money is not liquid. Therefore for people who want liquidity, it is best to avoid equity Mutual Funds.

However, at the same time, the less liquid the investment is, the more returns are offered as the money is taken for a longer-term.

As an investor, it is important to know when the money will be needed. When investing money the investor must make sure that the capital is safe to give away.

Expense Ratio – 4th Technique to Select a Good Mutual Fund

The expense ratio is the percentage of the capital that is applicable to the investors to manage the mutual funds.

This is because running Mutual Funds requires money.  It is the money that is used to manage mutual funds. It is even before we invest and improve the funds.

The lesser the expense ratio, the better it is on the investor’s side.

Even though initially the percentage of expense ratio charged on the capital sounds small when taken into capital terms it can be a pretty large amount.

Therefore it is best to look for fund managers charging less expense ratio.

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Turnover Ratio – 5th Tip to Choose a Profitable Mutual Fund

Another ratio to pay attention to is the turnover ratio.

The turnover rate is the amount of portfolio that is bought and sold every year. The more the turnover ratio or rate, the greater will be the tax.

Taxes take away a lot of the capital from the returns that the investor is going to receive.

Therefore it is best to opt for Mutual Funds that have a turnover ratio of less than 50% to avoid higher taxes.

It is also important to note that there are also tax-free accounts available to invest in mutual funds.

A person using a tax-free account does not need to worry about the taxes and therefore, the turnover ratio will not matter much.

Fund Management – 6th Tip to Choose a right Mutual Fund

When investing in Mutual Funds it is important to choose the fund wisely. Judging a fund by its performance in the last few months or even two years is not justified.

It is best to judge a fund’s performance based on its returns in the last decade or so.

This is because it will ensure that the fund has gone through different market cycles and situations. Yet, it has been stable and given favorable returns.

Similarly looking for a fund that has functioned in a systematic manner is important. This is exactly where the fund management team comes into play.

A fund management team with experienced, disciplined, and focused team members will ensure better returns and results of the investment.

For this, one can do research on the performance of the fund management teams.

Moreover, a fund manager that has his own capital invested in the same is trustable as he is equally affected by the investor’s perspective.

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Diversification of Assets – Last Tip to Select a Right Mutual Fund

Diversification of assets means investing in different funds and markets. It is important to diversify one’s investment to ensure that the risk is balanced out.

Therefore, the loss of one fund will be compensated by the profit of another. When diversifying assets it is important to not only invest in different funds but also in different fields.

Moreover one must realize that stocks are not the only thing available to invest in. Other funds to invest in include real estate funds, convertible funds, fixed-income funds, etc.

Investing in different funds will ensure that even if the market is hit hard, the portfolio of the investor does not suffer a lot.

Another smart thing to do is to invest more into a core fund that is suitable to the investor and diversify the other parts.

How to Select the Right Mutual Fund? – Conclusion

Mutual Funds investments are a great opportunity for investors to make money out of capital that is not in use.

One can easily choose the right type of mutual fund based on several aspects like a goal, risk, fund type, etc.

Mutual Funds may seem a little difficult to understand for outsiders however these are not as complicated as one might think.

Paying attention to the above-mentioned points will greatly help an investor in making the investing experience profitable and less complicated.

Moreover, for beginners, who don’t understand mutual funds and the financial market, it is best to consult a financial advisor for Mutual Funds investment.

Financial Advisors not only help in better investment but also break down complicated terms and schemes into simple and understandable language for the investor.

This not only helps the investor in making the right investment but also teaches a person about the market and it’s working.

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