Are Returns the Only Criteria for Choosing a Mutual Fund?

Last Updated : Aug. 14, 2019, 11:19 a.m.

Mutual fund investments offer scope for greater returns because of their well-rounded portfolio or say a diversified portfolio going by the terminology used in this asset class. The fund with highest returns catches the eye of investors without a doubt. Many pump in the money at the very sight of impressive figures. But, is it wise to be impulsive with mutual fund returns? Well, the return is one of the topmost criteria while choosing a mutual fund. But, it’s not the sole criterion to consider. So, what are all criteria that you should evaluate before stepping into the world of mutual funds? The article will tell you all those. So, keep reading to know the considerations necessary for a successful journey with mutual funds.

Criteria Other Than Returns to Consider

Here’s a list of criteria you need to consider beyond returns while choosing a mutual fund scheme .

Don’t Deviate from Your Investment Objective

The first thing you should consider is the objective you want to achieve from investing in mutual funds. Is it the long-term capital growth, regular income generation or a combination of both? Equity funds can generate long-term capital growth by investing in the high-return proposition of equities. On the other hand, debt funds can lead to regular income by investing predominantly in fixed income instruments such as bonds, debentures, etc. Interestingly, hybrid funds invest in both equity and debt instruments to provide capital growth as well as regular income generation. So, choose a fund that matches your investment objective.

Be Fully Aware of Your Risk-appetite

Any investments, be it mutual funds, carry a degree of risk that means the probability of losing the invested capital or the returns on it. Those with a high-risk appetite can go for equity mutual funds as they mainly in the volatility of equities. Individuals with a low-risk appetite should choose debt funds. Lastly, those between high and low-risk appetite can opt for hybrid funds.

Analyze the Fund Performance from Different Aspects

A mere look at the return doesn’t show the mutual fund in the right light. You need to see the pattern of returns before making a summation of the fund. If the returns have been consistently good over different periods, it means the fund has gone through the thick and thin of the market successfully. And so, one must look to invest in such a fund. In contrast, if the fund has delivered massive returns of late but its performance overall is not something to write home about, it should be skipped. Also, check whether the fund performance in comparison to its benchmarks. The fund must have delivered better returns than its benchmark to earn your faith.

Check the Profile of the Fund Manager

The good thing about mutual funds is that dedicated personnel (fund manager) is behind your investments 24×7. As you would know that markets are volatile and sensitive at the same time. They understand the nerves of the market and plan their mutual fund investment strategy accordingly to ensure your money earn the returns it should to satisfy the investor in you.

From reading the complex market data to understanding the nuances of the possible impact of economic, political and social developments on your investments, fund managers relieve you from the tough task of maneuvering your money to reach the top. So, it only pays to give a good hard look at the profile of the fund manager in charge of the respective fund. See the length of his/her experience in the asset management space and accomplishments.

Glance at Asset Under Management

It’s good to be associated with a mutual fund scheme whose Asset Under Management (AUM) is significantly high. This creates an impression that investors are trusting the fund greatly by investing more. Although it does not have a bearing on the performance of the fund, a high AUM can be seen in a positive light. At the same time, funds with low AUMs can’t be discarded if there’s an efficient fund manager at its helm.

Disclaimer – “Mutual fund investments are subject to market risks. Please read the scheme document carefully before investing”.