How to choose the right mutual funds in India in 2024 for your financial goals

If you are a new investor, you are bound to wonder ‘how to choose mutual funds for investing?’ While this is a common question, it doesn’t have a one-size-fits-all answer. However, when you investing in mutual funds, you can choose funds after evaluating certain parameters like your financial goals, the fund’s performance, expense ratio, risk exposure, and taxation implications. This article outlines how you can choose mutual funds for investment to invest better,

If you’re wondering how to choose mutual funds, here’s a list of factors you should consider to make an informed choice:

Goals

One of the first things to consider is the purpose of your investment. Your financial goal can be anything from a short-term objective like purchasing a new laptop or planning a foreign vacation to a long-term one like saving for retirement and preparing for your kid’s college education. When you identify the end goal of your investment, you understand how much you need to save, what are your return expectations, and for how long you should remain invested. In simple words, your financial goals help identify the target amount, returns required, and your investment horizon. It is easier to exit your investment during short-term fluctuations in the absence of a well-defined goal. Setting clear goals keeps you motivated and helps you choose the right funds to meet your needs.

Risk

No guide on how to choose mutual funds is complete without acknowledging the importance of one’s risk tolerance capacity. While all mutual funds carry some degree of investment risk, not all fund categories are equally risky. Similarly, the risk-return balance of funds also varies. For instance, equity mutual funds invest primarily in company stocks and are subject to intense market fluctuations. While volatile, equity-oriented mutual funds also offer higher return potential than other types of mutual funds. Alternatively, debt funds are more stable, but offer lower returns than equity mutual funds. While suitable for conservative investors, debt funds also carry credit and interest rate risks. Therefore, before you proceed to fund selection, you must assess and analyse your risk profile to choose funds accordingly.

Liquidity

Liquidity is another key factor to consider when choosing mutual funds for your portfolio. In simple words, you must estimate when you will require the investment. You should avoid equity funds if you anticipate needing the invested funds in the near future since equity funds offer good returns over a long-term horizon. In such cases, short-term and ultra-short-term debt funds may be better alternatives. If you can remain invested for 5-10 years at least, you can consider equity funds because this gives you corpus enough time to compound and recover from short-term fluctuations. Additionally, you should avoid ELSS funds if you anticipate needing the corpus soon since these funds come with a mandatory lock-in window of 3 years.

Investment strategy

Most investors wondering how to choose mutual funds overlook this vital factor when selecting mutual fund schemes. Investment strategy is the strategy that an AMC adopts to make investment decisions. In simple terms, it is the approach the fund manager uses for asset management, including making decisions regarding fund allocation and trading. If the fund’s investment strategy does not align with your investment philosophy, it may be unsuitable for you,

Fund performance

Fund performance plays a crucial role in determining how to choose mutual funds for investment. Remember that a reasonable time-frame of 5-10 years is mandatory when assessing fund performance. A sufficiently long time-frame allows you to review the fund’s performance through multiple market cycles for a thorough assessment. If the fund has not been able to beat its benchmark or offer at par returns over 3, 5, 7, or 10 years, it might not be a good investment. Additionally, you should also check the details of the fund manager and the management team while evaluating the fund’s performance. Choosing a fund with an experienced fund manager who has a good track record of performance may be beneficial.

Expense ratio and exit load

When choosing mutual funds for your portfolio, you also need to consider the investment costs. Expense ratio of a fund is the annual fee charged by the AMC to manage your investment. It is basically the fund manager’s fee that’s payable by all investors. While it may seem negligible at present, expense ratio costs can become hefty when calculated across your total investment portfolio. Therefore, choosing mutual funds with lower expense ratios allows you to save more on expense ratio costs in the long-run. Similarly, exit load is the 0.5%-1% fee charged by fund houses to discourage investors from exiting their investments in the short-term. Generally, most MF schemes have a minimum investment period (1 year). If you withdraw before the lapse of this minimum duration, you have to pay the exit load charges.

Taxes

If you’re wondering how to choose mutual funds for your portfolio, you cannot afford to overlook the taxation aspect. According to the Income Tax Act, 1961, capital gains from the sale of MF units is subject to taxation. Taxation norms vary depending on the type of fund in question and the holding period of your investment. For instance, equity funds attract an LTCG tax 12.5% if sold after 12 months (capital gains up to 1.25 Lakhs/year is tax-free). A STCG of 20% is applicable on the capital gains arising from the sale of equity funds that were held for less than 12 months. For debt funds, all capital gains are taxed as per your applicable income tax slab, regardless of the holding period, while taxation provisions for hybrid funds depend on their asset composition.

• Assess your goals, risk appetite, and liquidity requirements before selecting a mutual fund.
• Review the fund’s performance, expense ratio, and exit load.
• Understand the taxation provisions to make informed choices.

Understanding how to choose mutual funds can make or break your investment journey. In fact, the success of your investments depend entirely on how you choose mutual funds. Reviewing your goals, risk tolerance, and liquidity needs is crucial. Additionally, you also need to assess the fund’s investment strategy, performance, expense ratio, and exit load to make an informed choice. Lastly, a careful assessment of the taxation provisions helps you invest in MF without shouldering a hefty tax liability.

Now that you know how to choose mutual funds, you can head to the Bajaj Finserv Mutual Fund Platform to start investing. Here, you can compare 1000+ mutual funds and start SIPs with a few easy clicks. Additionally, you can estimate your future returns using the Mutual Fund Calculator tool and refine your investment approach further.