How to Analyse Mutual Fund before Investing?

One of the most popular and effective ways of investing is to park your savings in mutual funds. If you have been looking at mutual fund options to invest your hard-earned money in, you must know the steps to effective mutual fund analysis as these will help you ensure that your investment objectives are being met in an efficient manner. You should consider the following points as part of your mutual fund analysis, before deciding on the fund you want to invest in.

Mutual fund analysis

There are many types of mutual funds for you to choose from, based on your investor profile. You can choose to invest in debt funds, equity funds, passive funds or hybrid funds, after you decide on your risk appetite, investment objective, time horizon, and return requirements. Undertake an effective mutual fund analysis by considering the following points:

• Mutual fund expense ratio: This is an important number to think of, as it is the percentage of total assets that the scheme charges you, annually, for managing your fund. Based on active or passive funds, you will find your expense ratio changing significantly. If you are keen on reducing your expense ratio, you can pick passive mutual funds, which track an underlying index, and offer you returns in line with the market. It is best to pick schemes with low expense ratios as this will help you ensure that most of your invested money goes into the purchase of fund units. Even in active funds, you can pick the direct option, as this option does not charge you brokerage fees or commission. However, you must ensure that the expense ratio is not the only factor you consider while choosing a mutual fund investment.
• Fund vs benchmark performance: The next aspect of mutual fund analysis is the performance of the scheme, with respect to the performance of the benchmark. Based on the scheme you pick, and the underlying securities, you can benchmark your chosen fund’s performance and check whether or not it is performing well. Suppose you are investing in an active equity fund which parks its corpus in automobile stocks. You should benchmark this fund with the Nifty auto index, and check whether or not it is offering better returns than the benchmark. This helps you pinpoint the best scheme for investment.
• Assess your risk appetite: If your risk appetite is low, you should not be investing in a mutual fund scheme with a high risk quotient. No matter the mutual fund NAV (net asset value) or the returns on the fund, if it is not aligned with your individual profile, it is not a good fit for you.
• Analyse the scheme’s history: Before deciding on the fund to invest in, you must take a detailed look at the mutual fund scheme’s history. If it is a new fund, consider similar funds offered by the fund house, and look at the history of the fund managers, to ensure that the scheme is in line with your investment goals and return requirements. This will help you avoid investment mistakes which may prove costly in the long run.  

Factors to consider before investing in mutual funds

It is a great idea to invest in mutual funds. There are some factors that you should consider before investing in the same, and these include aspects such as your investor profile, return requirement, time horizon, and risk appetite. These factors are unique to you and can help you decide which fund house and scheme suits your personality and requirements the best.

Investing your money is a hard decision and it requires a lot of planning and consideration. It is also difficult to be logical and rational when it comes to something as personal as your finances. However, the best way to ensure that your investment portfolio is able to meet your requirements is to know yourself well, and understand your investment objectives. Once you have these aspects in mind, you will find it extremely easy to zero in on the best fund and start your investing journey.

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