When it comes to investing in mutual funds, investors are mostly spoilt for choice as they are over 2000 mutual funds in the market. However, comparing mutual funds can be quite challenging, especially if you're new to investing. You need to take into account a range of factors, which can make the process daunting.
While having options is unquestionably a positive thing, having too many possibilities might make choosing a fund challenging. Choosing the right mutual fund is essential for reaching long-term objectives, especially since investing requires a long-term commitment utilising your hard-earned money. This is where having a clear understanding of how to compare mutual funds' performance, and other attributes can help choose investment strategies that are in line with your investment aims.
Why should you compare mutual funds?
When considering mutual fund options, you will find many funds with enticing benefits and low initial investments. However, at first glance, funds within the same category may seem alike, making decision-making challenging. Investing requires long-term commitment, so it is crucial to understand what you're getting into. While many investors focus solely on fund returns, it is essential to consider other factors such as consistency of returns, fund house reputation, and risk-adjusted returns.
Fund returns indicate the difference between the Net Asset Value at the start and end of a specific period. Annualised returns reflect value changes over time, but evaluating consistency, fund quality, and risk-adjusted returns is equally important. Comparing mutual funds based on these aspects and using financial ratios can guide you in making informed decisions about the right fund for your investment goals.
How to compare mutual funds?
When investing in mutual funds, it is essential to compare your options thoroughly to make informed decisions. By evaluating factors like performance, fees, risk levels, and investment objectives, expense ratios, etc. investors can determine which mutual fund aligns best with their financial goals and risk tolerance. Let us explore in detail:
1. Expense Ratio
The expense ratio is the fee that fund houses charge for managing your investment portfolio. It comprises expenses such as management fees, marketing expenses, administrative expenses and so on. The expense ratio is calculated as a percentage of your investment in the fund. Generally, the lower the expense ratio, the better.
2. Investment Objective
Before investing in mutual funds, you need to determine your investment objective. Once you have identified your goals, choose a mutual fund that aligns with your investment objectives. For instance, for long-term investment goals, equity funds are preferable, while debt funds are suitable for short-term investments.
3. Mutual fund performance comparison
When comparing mutual funds, you must take the performance of the fund into account. The performance of a fund can be traced back to its past returns. However, past returns do not guarantee future returns, so one must exercise caution when using them to make investment decisions.
4. Risk Profile
The risk profile of a mutual fund is determined by the percentage of equity and debt instruments it holds. Funds with a higher percentage of equity are riskier but offer higher returns. On the other hand, debt funds are less risky but provide lower returns. Depending on your risk appetite, select a mutual fund that matches your risk profile.
5. Asset Under Management (AUM)
A fund's AUM reflects its popularity and the level of investor confidence. While larger AUM may indicate a more stable fund, it could also lead to slower growth and reduced flexibility.
6. Exit Load
When you invest in mutual funds, you need to keep in mind the exit load, which is a fee charged if you withdraw your investment before the stipulated time. Exit loads vary from fund to fund and can impact your returns.
