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How do you evaluate mutual funds

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How do you evaluate mutual funds?
There are so many different schemes of mutual funds available as we have studied in this project.
So, how do you start investing in these mutual funds?
All mutual fund schemes have different investment objectives, tax implications, risk-reward ratios
and so on. While selecting a MF scheme, an investor must consider some basic factors of the
scheme.
1. Investment Objective: Before investing in a scheme, you need to determine you own
investment objectives and financial goals. This makes choosing a scheme that aligns with
your investment objectives easier.
2. Rate of returns: When comparing Mutual funds, you can compare the rate of returns
offered by the various schemes in the past. Preferably use the 3yr to 5yr rate of return to
obtain a reasonable basis to compare funds. Using the 1yr rate can often show skewed
comparison. Also, compare the returns to the benchmark performance. A benchmark is an
index against which a mutual fund's performance is measured. For example, the Nifty 50 is a
benchmark against which many large-cap funds and index funds are measured.
3. AUM: AUM or Assets under Management refers to the total market value of the assets that
are being managed by the mutual fund. This has to be nor too big nor too small; preferably
in the range of ₹2,000 to ₹25,000 crores. This will provide the investor with stable and less
volatile returns. Avoid big AUM small cap investments.
Should you consider Assets under Management while investing in mutual funds? This
decision depends upon the type and size of the fund you are investing in Equity funds: AUM can stand at the back foot while investing in equity mutual funds.
The consistency of returns is reflected by how well a mutual fund performs during
market fluctuations.
 Debt funds: A debt mutual fund that has a high fund size or larger assets under
management is in a better position to distribute fixed fund expenses across its
investors. A large fund size would mean a lower expense ratio per person which in
turn gets reflected in the fund returns.
 Small cap or Mid cap funds: Building meaningful positions in a small-cap fund could
get hard with an increase in assets under management (AUM). To buy a meaningful
position in such a company, it is still okay for a fund managing around ₹ 100-200 crore
of assets. But for a much bigger fund, taking a 5 per cent position in many small-cap
companies will not be possible, and it may also not be easy to sell these positions
when they want to.
 Large cap funds: Large cap funds can easily accommodate high AUM.
4. Expense ratio: This is ratio measures how much of a fund's assets are used for
administrative and other operating expenses. An expense ratio of 1% per annum means that
each year 1% of the fund's total assets will be used to cover expenses. It's important to
compare a fund's expense ratio with similar offerings so you don't overpay for your fund's
management services. In general, an expense ratio over 1% may be too high for the average
investor
5. Exit load: It is the commission to fund houses or exit penalty if an investor exits the fund in
the lock-in period. If looking to invest in mutual funds for a short term, an investor must pay
attention to the exit load of the scheme. Usually, exit loads are charged by mutual fund
schemes if an investor exits the fund within one year.
6. Risk appetite of the investor: Younger investor have a bigger risk appetite than the older
investors due to the availability of higher amount of corpus. Small cap and mid cap equity
mutual funds have higher risks associated with them than the debt MF or large cap equity
MF. However, just because the risk is too high doesn’t mean you should not invest in these
schemes because these schemes also have high returns. Thus, younger investors can add
these high risk MF schemes in their portfolio by investing up to 10-15% of their corpus to
obtain higher returns.
7. Direct plans: Investing in a Direct Plan is like buying a product from the manufacturer
directly, whereby the cost to customer would be lower. These plans have a low expense
ratio because they don’t charge a distributor commission.
Nature of Investment (SIP/Lump sum)
There are two ways of investing money in mutual funds. You can either invest through a SIP or invest
a lump-sum amount.
1. Lump-sum investment: You may invest a considerable portion of your disposable income in
a mutual fund scheme of your choice. However, investing a lump sum involves higher risk.
2. Systematic Investment Plan (SIP): Under a Systematic Investment Plan, you instruct the
bank to deduct a fixed sum from your savings bank account each month and invest in a
mutual fund scheme. In this way, you can buy units continuously without having to worry
about the right time to enter the market. So if you are a student or a part time worker or a
beginner to investing and don’t have a large corpus to invest, you can invest small amount of
money in MF schemes regularly.
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