How to choose the right Mutual Fund scheme

Once you are comfortable with the basics, the next step is to understand your investment choices, and draw up your investment plan relevant to your requirements. Choosing your investment mix depends on factors such as your risk appetite, time horizon of your investment, your investment objectives, age, etc.

What should be kept in mind before investing in Mutual Funds ?
Mutual Fund investment decisions require consistent effort on the part of the investor. Before investing in Mutual Funds, the following steps must be given due weightage to decide on the right type of scheme:
1. Identifying the Investment Objective

2. Selecting the right Scheme Category

3. Selecting the right Mutual Fund

4. Evaluating the Portfolio

A) Identifying the Investment Objective
Your financial goals will vary, based on your age, lifestyle, financial independence, family commitments, level of income and expenses, among many other factors. Therefore, the first step is to assess you needs. Begin by asking yourself these simple questions:

Why do I want to invest?
The probable answers could be:

·                    "I need a regular income"

·                    "I need to buy a house/finance a wedding"

·                    "I need to educate my children," or

·                    A combination of all the above

How much risk am I willing to take?
The risk-taking capacity of individuals vary depending on various factors. Based on their risk bearing capacity, investors can be classified as:

·                    Very conservative

·                    Conservative

·                    Moderate

·                    Aggressive

·                    Very Aggressive

To ascertain your risk appetite, try out our Risk Thermometer.

What are my cash flow requirements?
For example, you may require:

·                    A regular Cash Flow

·                    A lumpsum after a fixed period of time for some specific need in the future

·                    Or, you may have no need for cash, but you may want to create fixed assets for the future

B) Selecting the scheme category
The next step is to select a scheme category that matches your investment objectives:

·                    For Capital Appreciation go for equity sectoral funds, equity diversified funds or balanced funds.

·                    For Regular Income and Stability you should opt for income funds/MIPs

·                    For Short-Term Parking of Funds go for liquid funds, floating rate funds, short-term funds.

·                    For Growth and Tax Savings go for Equity-Linked Savings Schemes.

Investment Objective	Investment horizon	Ideal Instruments
Short-term Investment	1- 6 months	Liquid/Short-term plans
Capital Appreciation	Over 3 years	Diversified Equity/ Balanced Funds
Regular Income	Flexible	Monthly Income Plans / Income Funds
Tax Saving	3 yrs lock-in	Equity-Linked Saving Schemes (ELSS)

C) Selecting the right Mutual fund
Once you have a clear strategy in mind, you now have to choose which Mutual fund and scheme you want to invest in. The offer document of the scheme tells you its objectives and provides supplementary details like the track record of other schemes managed by the same Fund Manager. Some important factors to evaluate before choosing a particular Mutual Fund are:
The track record of performance over that last few years in relation to the appropriate yardstick and similar funds in the same category.
How well the Mutual Fund is organized to provide efficient, prompt and personalized service.

The degree of transparency as reflected in frequency and quality of their communications.

D) Evaluation of portfolio
Evaluation of equity fund involve analysis of risk and return, volatility, expense ratio, fund manager style of investment, portfolio diversification, fund managers experience. Good equity fund should provide consistent returns over a period of time. Also expense ratio should be within the prescribed limits. These days fund house charge around 2.50% as management fees.
Evaluation of bond funds involve it's assets allocation analysis, return's consistency, its rating profile, maturity profile, and its performance over a period of time. The bond fund with ideal mix of corporate debt and gilt fund should be selected.