Investing in mutual funds has become increasingly popular among High Net Worth Individuals (HNIs) and seasoned investors in India. However, with a plethora of mutual fund schemes available, it can be daunting to select the right one. It is essential to understand that choosing the category and the scheme of a mutual fund are two different things, and investors must understand this before making any investment decisions.
Investment in a diversified portfolio of stocks, bonds, and other securities is made simple by the availability of mutual funds. The two primary categories of mutual funds are equity funds and debt funds, while hybrid funds invest in both.
- Equity funds invest primarily in stocks and are considered high risk due to market fluctuations, but offer the potential for long-term growth. The minimum investment period for equity funds is three years to minimize short-term volatility.
- Debt funds invest primarily in fixed-income securities such as government bonds, making them less risky and offering lower potential returns. Liquid funds are debt funds that invest in short-term instruments, making them ideal for short-term investments.
- Hybrid funds invest in both stocks and bonds to provide a balance between growth and stability and can be held for a more extended period.
Investors should aim for a diverse portfolio, considering factors such as investment goals and risk tolerance when selecting mutual funds. Before investing, HNIs and seasoned investors in India should keep in mind some factors that can help them choose the right mutual fund scheme.
Firstly, checking the fund performance of the mutual fund scheme before investing is crucial. Comparing the 3-5 year performance against the benchmark as well as the category of the fund and the consistency of the performance is essential. To ensure optimal performance, it is recommended that a fund’s asset allocation be aligned with its benchmark index. Additionally, investors are advised to evaluate the fund’s performance relative to other schemes within the same category. Benchmark indices serve as a benchmark against which a fund’s asset allocation and performance can be assessed.
Secondly, investors should check the performance of Asset Management Companies (AMCs). The overall track record of an AMC matters the most, as it reflects the investment decisions that are made and how fund schemes may perform in the future. It is essential to evaluate the fund manager’s experience, investment philosophy, and approach to risk management.
Thirdly, all funds come with some costs and fees, which include managerial and operational charges. The expense ratio is a crucial factor that investors should check, as even the slightest difference can impact your wealth growth significantly. The Securities and Exchange Board of India (SEBI) has capped the expense ratio at 2.25% of the total fund assets by capital markets that an AMC can charge. They have even proposed a uniform expense ratio across all schemes, which is still under debate.
Fourthly, some funds have an exit load if an investor prematurely exits the fund. Hence, investors must check if the schemes have any exit load or if they are free from it. A more significant Assets Under Management (AUM) indicates a larger fund corpus from the collection of funds from investors and also suggests that more investors are involved.
Finally, HNIs and seasoned investors should look for mutual funds with consistent long-term performance and a track record of delivering above-average returns. It is also essential to evaluate the fund manager’s experience, investment philosophy, and approach to risk management.
In conclusion, choosing suitable mutual fund schemes require careful consideration of investment goals, risk tolerance, fees, and performance. Following the guidelines outlined above, HNIs and seasoned investors in India can make informed investment decisions and achieve their financial goals. Investors should consult a financial advisor to assess their investment goals and risk tolerance before making investment decisions.