A complete guide on how to compare mutual funds to make an informed choice.
Mutual Funds are undoubtedly some of the most versatile investment instruments as you can choose from a wide variety. The SEBI has categorised Mutual Funds into five broad types, and each category is further sub-divided into different types based on investment durations, returns and asset allocation, and structure. As such, it can be overwhelming to choose the best Mutual Funds. You should thus know how to compare mutual funds. Here are some ways to go about it.
You can compare Mutual Funds schemes by considering these factors mentioned below:
A benchmark sets a yardstick that allows you to gauge the performance of a mutual fund. You can look at the returns a fund has generated and compare them to what it should have ideally delivered. Since SEBI mandates the same, funds declare their benchmarks, and as the investor, you can consider it a target to analyse fund performance.
Investment horizon refers to the time period for which you stay invested in any mutual fund scheme. Thus, your investment horizon becomes a driving factor that helps you compare and choose a fund suitable for you. For instance, equity funds come with medium to long-term horizons, whereas you can find a wide variety of short-to-long term Debt Funds ranging from overnight funds to 10-year duration funds.
When you compare funds, you must consider the risks associated with the investment. Risk is a broad term here that signifies both - the risks associated with the market movements, i.e., the rising, falling, or static Net Asset Value (NAV) and your personal risk tolerance levels. While generally higher risk entails higher rewards, this rule does apply to funds generating fixed income. You must compare funds based on the risk-adjusted returns.
Fund houses and professional fund managers charge a fee for their services. These charges, such as entry and exit load, fund manager’s commission, etc., fall under the broad umbrella of expense ratios. High expense ratios can eat into your profits. You typically have to pay lower expense ratios if you invest in funds of the same category. Also, expense ratios differ from one fund category to another. For instance, the expense ratio for passively-managed index funds is lower than for actively managed funds.
Besides the fund specific factors, you must also consider your personal factors when you compare Mutual Funds. Take your investment decisions after determining your investment objectives and preferred investment horizons, along with your risk-bearing abilities. While low-risk investors may consider Debt Mutual Funds generating regular but lower returns, aggressive investors may benefit from investing in Equity Funds. If you wish to balance the risk levels, you may consider Hybrid Funds too.
Consider the above factors and run a Mutual Fund comparison before investing your funds. You may also consult an investment advisor or check out the Mutual Fund Investment page on digibank. Access over 250 Mutual Fund Schemes online based on your specific investment goals and begin your investment journey.
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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.