Pick your Mutual Fund scheme smartly

Mutual fund is one of the most common investment avenues for a common man today. A mutual fund is a type of professionally managed collective investment vehicle that pools money from many investors to purchase securities.
 
Though mutual funds offer several advantages to investors, such as – professional management, liquidity, diversification etc. However, selecting a suitable mutual fund scheme to match your needs can be tricky.
 
Here are a few tips to help you to invest in a mutual fund scheme in order to match your financial requirements:
 

1) Set down your goals before investing: Investments with sole purpose to fetch maximum returns is not the justified approach towards your financial aims. Make sure that every investment of yours is to meet a preset goal.

 
2) Know the scheme’s risk statistics: A mutual fund scheme generating above average returns doesn’t have to be suitable for you. It is highly recommended to ensure that the risk statistics of the scheme matches your risk profile. An aggressive equity scheme is not suitable for you in your 50’s despite of the fact that it earns good return on your money.
 
There are two widely used measures to assess risk of a scheme namely Standard deviation and Beta.  
 
Standard deviation gives you the picture of volatility in scheme’s returns from its own average returns over the years. On the other hand, Beta captures scheme’s movement in relation to the market. Let us say a scheme has a beta of 1.5. If movement in the market index is 10%, the scheme NAV will move 15% thus fetching a higher return or higher losses.

Hence, schemes with high SD or high Beta are not recommended for investors with moderate or conservative risk profile.
 
3) Keep track of Alpha of the fund: In simple terms, alpha is nothing but the returns earned by the fund over its expected returns in view of its beta.
 
Let us understand it with an example. Fund XYZ has a beta of 0.80 and risk free return is 8%. Market index offers 10% return. Expected returns from the fund would be 8% + 0.8 (10 – 8) = 9.6%. If the actual return generated by the fund is 12%, then alpha would be (12 – 9.6) = 2.4. On the other hand, if actual return is lesser than the expected return, alpha would be negative.

Alpha denotes efficiency of the fund manager.
 
In a situation, where alpha of the fund is constantly on the negative side, you should not wait to get rid of the mutual fund scheme.
 
4) Evaluate the fund manager: A fund manager is the mainstay of a mutual fund scheme. In order to evaluate a fund manager, you must evaluate the fund manager’s record of accomplishment: how his schemes have performed over the years.
 
5) Position in Nine – Grid Box: The nine – grid box gives you quick snapshot of the type of MF scheme in one glance. (Image Source Page: http://mytagpay.com/401k.html)

 
This gives you a picture of scheme’s investment style as well as market capitalization of the securities held under it. By having a look at this box for any mutual fund scheme, you will be able to figure out, whether that scheme matches your need or not to a fair extent.
 
6) Monitor your mutual fund portfolio time to time: Last but not the least, keep a track of your portfolio on a regular basis. Your job doesn’t end with picking the suitable scheme, it has to be monitored effectively too. Finance is a world of changes and MF industry is no exception. There might be a situation when your fund is not performing well. It would be better to come out on time rather than being stuck in the scheme for a long time to recover your invested money on the least.

 
So, from now on before you invest your hard-earned money in a MF scheme, make sure that it is appropriate for you.

Happy Investing!!!
 

Source: InvestmentYogi is one of the leading personal finance websites in India