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| Edited By: Ravi Gopalakrishnan |Source: DNA |Updated: Mar 21, 2018, 06:04 AM IST
We all have attended weddings and tasted buffets; the variety of cuisines offered just makes our mouths water. But not everyone likes everything, we all have our favourites. Kids might prefer desserts, while health conscious people prefer soups & salads and we all have some cheese lovers amongst us who would like munching on pizzas & pastas. We all have preferences and based on our taste buds we choose the dish we want to eat. The scenario for mutual funds is similar. There are various mutual fund products offered in market and the selection of funds should be done judiciously. Following are few parameters one should take into consideration before selecting the best suited fund:
Selection of the fund to be invested in should be done based on one's objective for investing. If the goal is to save tax, then one should opt for ELSS funds. If one is looking for an avenue to park surplus funds for a short-term period, one may opt for liquid funds.
Different schemes have different risks attached to it. An aggressive investor can look at equity mutual funds whereas conservative investors who are looking for stable income may take debt funds into consideration. The risk level of a scheme can be gauged by looking at the riskometers which are mentioned along the scheme names.
Knowing one's time horizon is extremely important when it comes to choosing the type of mutual fund one wants to invest in. Mutual funds offer various funds catering to different needs of an investor. An investor can invest in liquid, ultra-short term or short-term fund category for a tenure of less than 1 year. While investment in equity funds viz. equity diversified funds, ELSS, sectoral or thematic funds etc, should be ideally be made for a longer tenure i.e. more than 3 years.
A scheme's past performance can be understood by looking at NAV movement and comparing the scheme returns with its benchmark. An investor can also find the scheme's return vis-à-vis its benchmark in mutual fund's factsheet
Investment objective and the portfolio of a scheme lay down the securities or instruments where the scheme has invested in. By looking at the scheme's asset allocation, an investor can understand the investment theme the fund is following. For example, if the scheme is investing across sectors/instruments then the portfolio is more diversified thus the risk is spread out.
Credit risk of a debt scheme can be deduced by the credit rating of instruments in which the scheme has invested. For example, if the scheme invests 70-80% in AAA or A1+ papers, it indicates that majority of portfolio is invested in instruments whose probability of default is very low.
The portfolio of scheme as on the last trading day of the month is available in the fund fact sheet or on mutual funds website. One can understand which securities the scheme is investing in and thus identify what drives the fund's performance through this data.
The writer is head – equities, Canara Robeco Mutual Funds
