Investors should consider several key factors before making their mutual funds investment decisions. These include assessing their risk tolerance, defining their investment objectives, understanding their time horizon, and evaluating the expertise and track record of the fund manager.
Investing in mutual funds can be beneficial in many ways. You get the advantage of instant portfolio diversification. Depending on the fund you choose, you may also benefit from expert fund management and tax benefits. However, the process of choosing a mutual fund can be quite intimidating for most investors. If you too find it daunting to select a suitable scheme for your portfolio, this article on the factors affecting mutual fund choices can help you.
Here, we take a look at the main factors affecting the selection of mutual funds and discuss an example for more clarity.
Factors to keep in mind while making mutual fund investment decisions?
Different categories of mutual funds have varying features and characteristics. These aspects need to align with your investment strategy and outlook. So, to ensure that you make a sound choice, here are some important factors affecting the choice of mutual funds.
Investment goals and risk tolerance
Your choice of mutual funds should align with your investment goals. For instance, if you want to earn a regular income, a debt fund that offers a fixed income may be suitable. However, if you want the opportunity to create wealth, market-linked equity funds may be better choices for your portfolio.
Your risk tolerance and risk capacity also affect the type of fund you should choose. This is, in turn, affected by your age, your financial stability, the nature of your income and your existing debts. If you can afford to take on more risk, equity funds may be ideal. However, for more conservative investors, balanced or debt funds may be better.
Past performance and fund manager’s track record
Past performance is not an indicator or a guarantee of any future returns. However, it can help you understand how a mutual fund scheme has performed across different market cycles and during different economic or geopolitical developments. You can also get a better idea of how the fund performed in volatile markets.
The fund manager’s expertise is another crucial factor affecting mutual fund performance. If you want to invest in actively managed funds, you must always check the fund manager’s experience, track record and history of fund management. This will help you choose a fund that is handled by an experienced professional.
Fund categories and strategy
There are different categories of mutual funds, like equity, debt, hybrid and more. Within each category, you have different sub-categories as well. To ensure that you make an informed choice, it is important to account for these factors affecting mutual fund selection among investors.
The category of the fund influences its investment strategy, which is another crucial factor to account for. Ultimately, the strategy adopted by the fund should be beneficial to your overall investment goals, so you can increase the potential to earn your required returns without compromising on your risk-taking capacity.
Economic conditions and market sentiment
These two factors also significantly affect mutual fund performance. During periods of economic growth, equity funds may perform well because top companies may report higher earnings and sustained profits. Conversely, in the case of economic downturns, debt funds may offer a safer avenue to invest your money as they provide stabler returns than market-linked investments. You also need to consider the positive investor sentiment during bullish phases and the negative sentiment during bearish phases.
Investment costs
The expense ratio of a mutual fund is also important. It gives you a better idea of the fees charged by the fund house. A higher expense ratio can be detrimental to your overall mutual fund returns. So, it is best to try and shortlist funds that have lower expense ratios. This way, you can maximise your returns as much as possible.
Investment horizon
Another important factor affecting the choice of mutual funds is the investment period or horizon. Close-ended funds have a defined investment tenure, while open-ended funds can be redeemed at any time. However, some assets like equity may offer better returns over the long term. You need to account for all these aspects too.
Tax implications
Mutual funds are also taxed differently based on the type of investments they include. Some, like Equity Linked Savings Schemes (ELSS), even offer tax benefits on the amount invested up to Rs. 1.5 lakhs. Before you choose a mutual fund, you must be clear about how the capital gains and dividends from the scheme, if any, will be taxed.
Professional advice
Professional advice can be invaluable when you are choosing mutual funds for your portfolio. Financial advisors assess your investment goals, current financial situation, risk tolerance and other aspects to recommend suitable mutual fund schemes. Their expertise and experience can help you avoid common investment mistakes and ensure that your fund choices align with your long-term financial objectives.
Example of considering different factors affecting mutual fund selection
Say you are an investor with the following profile and financial scenario:
- Age: 40 years
- Investment goal: To build retirement savings in the next 20 years
- Risk tolerance: Moderate
- Investment budget: Rs. 25,000 per month
In this case, considering your age, goals, investment horizon, risk tolerance and investment budget, you can choose balanced funds or large-cap equity funds for your portfolio. To further compare and shortlist suitable mutual fund schemes, you must also look into the expense ratio, the experience of the fund manager, the fund’s track record and other factors affecting mutual fund choices explained earlier.
Conclusion
The bottom line is that before you invest in any mutual fund, you need to factor in the aspects outlined above. This way, you can ensure that the fund aligns with your overall investment strategy. Once you have considered all the factors affecting the selection of mutual funds, you can shortlist some schemes and compare mutual funds to find the perfect fit for your portfolio.
The Bajaj Finserv Mutual Funds Platform makes mutual fund investments easier for you, with over 1,000 mutual fund schemes to choose from. You can even decide to make a lumpsum or a SIP investment — whichever works best for you.
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