6 Things to Check in a Mutual Fund

Like any kind of investment requires some basic research mutual funds too. People usually invest in mutual fund on the mutual fund distributor recommendation or they invest by simply checking the top performing funds on the internet. This is not the right way to invest. Few basics things should be checked in the Mutual Fund always before investing

  1. Your time horizon

Investment in mutual fund should be as per your time horizon. If you want the funds back soon, then investing in equities is not a good idea for you. In general, if your holding period is less than a year then you should go for liquid fund or fixed maturity fund, if your time horizon is more than one year but less than three years then go for the balanced fund and when you are ready to give more than five years go for the equity fund.

2. Expense Ratio

Your mutual fund charges some fees for managing your money. That fees various from fund to fund. Higher fees will put some dent in your returns. Compare the funds in the category you wish to invest and look for the fund with reasonable fees.

3. Turn over ratio

Turn over ratio indicates how many times a the mutual fund manager is turning the portfolio. A higher turnover tells the fund manager is doing more buying and selling and a lower means he is doing less buying and selling. I prefer fund with lower turnover ratio. As investment in mutual fund is for long term I don’t want the manager to be doing trading like investment.

4. Number of stocks

Mutual fund typically holds lots of stocks. Too many stocks helps in limiting the fall but it also makes the portfolio rise limited when market do well. I prefer to avoid the funds holding more than 80 stocks in their portfolio. Also, check how much allocation is there in the top 10 stocks.

5.Performance

How the fund has performed in the past also matters. Here one should prefer the fund with slight out performance and not very superior performance. Very great performance specially in the recent year means, that fund will be getting lots of money from the investors. More money meas the fund manager is most likely to run out of good ideas and his performance in future won’t be that great like before.

6. Portfolio valuation

Many investors ignore this very important valuation factor. Check what is the average PE or P/B ratio of the portfolio. If this ratio is high the fund is most like to underperforme in future.

This was all from my side, if you believer there is something else to be checked do let me know in comments.

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