Mutual funds are an essential investment tool to meet short-, mid- and long-term financial goals. Broadly, there are three categories of mutual funds: equity, debt and hybrid funds. However, under each of these three categories there are multiple sub-categories offered by various asset management companies (AMCs).
This is what makes choosing the right mutual fund scheme seem a bit of a daunting task based on one’s financial goal, investment time horizon and risk profile.
However, an investor can consider a few factors to look into while comparing mutual funds to make a worthy investment.
Returns: Compare the past returns offered by various fund types and their schemes. Generally, look out for historical returns of the past one year, three years and five years of various schemes to draw a comparison. However, returns are not the sole factor that an investor should consider while selecting the right mutual fund.
Returns compared to benchmark index: Check for how a particular mutual fund has performed against the benchmark index. It is mandatory for AMCs to declare a benchmark index that serves as a standard for its returns. The benchmark index highlights whether a mutual fund has outperformed or underperformed over a period of time.
Check for absolute returns: This highlights how a particular fund has performed over a time span. Have a look at the net asset value (NAV) and check it again after six months and continue doing so over a year or so. The percentage difference will highlight the return over this particular timeframe. However, it is essential to compare the right mutual funds.
Understand the risks involved: It is important to understand that high-risk funds do not guarantee higher returns. Ideally, compare mutual funds on the basis of risk-adjusted returns considering the overall market performance of the fund has an impact on its NAV.
Ranking: A mutual fund ranking can also serve the purpose of gauging the overall performance of the fund.
Track the time period: Essentially, track the time period of the performance of a mutual fund on the basis of the same fund type. For example, when comparing equity funds, track the funds’ performance in the last three-four years. Similarly, for liquid funds compare the funds’ performance in the last six-months months considering they are short-term funds.
Also, remember to compare mutual funds in the same asset classes. For example, comparing debt funds with equity funds will prove to be a futile exercise. It is important to set the investment time horizon to make the right fund choice.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.