When it comes to mutual fund investing, you can opt to start in one of two ways. You can either consult an advisor and invest. Or, you can save on consultancy charges and invest on your own. If you pick the latter option, you may be uncertain about how to analyse if a mutual fund is right for their portfolio. This article offers a guide on the factors to consider when choosing mutual funds for investment to help you make informed decisions.

If you’re confused about how to analyse if a mutual fund is right for you, here’s a list of handy parameters you can use to make an informed choice:

Expense ratio

The expense ratio of a fund is the annual management charge AMCs collect from investors. Mutual fund expense ratios cover distribution charges, management fees, transaction fees, and fund service charges. A fund’s expense ratio is calculated by dividing its total expenses by its average net asset value (NAV). Expense ratios are generally expressed as a percentage value. Generally, a higher expense ratio eats away at the returns from the mutual fund scheme. If you are a beginner, you must be wondering how this is possible. You can invest in mutual funds through direct and regular plans. The difference between the two lies in their expense ratios. Regular plans charge an intermediary commission which is absent in the case of direct plans because such plans are sold directly by the AMC without a broker/distributor. For regular plans, the commission of the intermediary is added to the fund’s expense ratio, increasing your overall investment cost. The annual commission generally ranges from 1%-1.25%, which can make a significant impact on your total annual returns.

Fund performance vs. benchmark performance

Another crucial factor to consider when choosing a mutual fund is its performance. Understanding the performance of a mutual fund scheme may seem relatively straight-forward, but it does involve a few nuances. For instance, how do you know if the fund has performed well? What indicators should you look for? These questions are common for investors wondering how to analyse if a mutual fund is right for them. To evaluate a mutual fund scheme, you must assess its performance against the respective benchmark of the scheme. Every MF scheme has a benchmark which is outlined in the fund offering document. Comparing mutual funds against benchmarks helps you ascertain if the fund’s performance is good or subpar.

For instance, let’s assume that the mutual fund you’re looking to invest in offers a 20% return over the last 3 years. On paper, this looks pretty good. However, when you compare the same against its benchmark, you find that the benchmark has offered a return of 25% over the same period.This means the fund on your radar has underperformed compared to its benchmark.

Therefore, it is always prudent to compare returns and performance against the benchmark index before selecting a mutual fund for your portfolio. Funds with consistently positive alpha readings (returns over the benchmark) are always better options.

Risk exposure

Mutual funds are subject to market risks like all other market-linked investments. Therefore, checking the risk exposure of a scheme before investing is a cardinal investment principle you cannot afford to overlook. When you’re selecting funds for your portfolio, you must ensure that the scheme’s risk level coincides with your risk appetite.

If you are a low-to-moderate risk investor, you can opt for debt funds and hybrid funds, while if you are a high-risk investor, you can consider small and mid-cap equity funds. Additionally, you must also factor in the risk-adjusted returns from the investment.

For mutual funds, risk and returns are two sides of the same coin. For instance, MF investments that offer better returns like equity funds also carry a higher degree of risk exposure. Understand these trade-offs carefully to choose funds that best align your own risk-return profile.

Fund’s track record

When learning how to analyse if a mutual fund is right for you, you must look at more than its comparative returns. In simple words, you must evaluate the fund’s performance over the long-term, rather than just comparing it against the benchmark index. A good MF is one that offers consistent and stable returns over a 5-10 year duration. For instance, you may be tempted to invest in a mutual fund that has offered 15% returns in the last 12 months. However, upon careful examination, you find that the fund did not perform well over the last 5 years. Assessing the fund’s performance over a fairly long period helps you gauge how it performs under different market conditions.

Fund manager

Another vital factor to consider when choosing a mutual fund is the fund manager of the scheme. The fund manager handles the MF portfolio, making buy and sell decisions. His investment acumen decides how well or poorly the fund performs in different market conditions. Therefore, reviewing the track record of the fund manager is crucial. It’s best to invest in mutual funds managed by experienced fund managers who can be trusted with your hard-earned money. Experienced fund managers with a history of successfully managing MFs inspires confidence that your investment will be safely managed for optimum returns.

Bonus tip: Check the portfolio turnover ratio of the fund

A mutual fund’s turnover ratio tells you how frequently securities from the fund are bought and sold by the fund manager. Most novice investors believe that portfolio turnover ratios have little to no bearing on their bottom lines and therefore, tend to avoid them. However, turnover ratio is indeed one of the most crucial variables to consider when learning how to analyse if a mutual fund is right for you. Funds with a high turnover ratio generally have higher fees, making the overall investment costs higher. In simple words, a high turnover ratio reduces your net returns from the investment.

• Consider the expense and turnover ratio of the fund.
• Analyse the fund’s performance track record and compare returns against benchmarks.
• Review the risk-return potential of the fund as well as the fund manager’s track record.

If you’re wondering how to analyse if a mutual fund is right for you, you can consider implementing the guide highlighted above. We have outlined the different factors you must consider while selecting funds to maximise earnings and minimise the potential of losses. Reviewing the past performance of the fund, comparing it against benchmarks, assessing its expense ratio, risk exposure, and the fund manager’s experience can play a crucial role in affecting your bottom line.

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