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Monday, May 17, 2010

How to select a fund?

There are over 700 mutual fund schemes running in India today and about 35 different companies that run these funds. So, how will you choose which fund to invest in? 

Goals. Are you investing to fulfill a short-term or a long-term goal? Or, are you investing just because you over heard in your office cafeteria that you should invest in a certain fund? Not all mutual funds serve the same purpose, so you should know why you are investing.
If you want capital appreciation for your child's education 20 years from now, it is better to invest in an equity fund rather than a bond or money market funds. Equity funds are definitely high on risk, but they have the potential to generate higher returns over 20 years compared with a debt fund. However, if you want to save and protect your capital for funding your child's education in two years, then you a more conservative fund like a bond or money market fund should be your choice. A short time period does not give you the flexibility to take on a lot of risk. 

Time horizon. This is one of the most critical factors while penciling on a mutual fund scheme. Ideally, an equity fund should be held for at least 3-5 years because equities are long-term investment vehicles. Debt or money market funds, on the other hand, can be invested in for shorter periods of time. 

Promoter of the fund. A lot of new companies are starting fund houses. Many of them will not be as successful as the ones that already have a successful track record built over the past 5-10 years. Therefore, it is advisable to do some homework before selecting a mutual fund scheme. One should not give in to the marketing tactics of a company or a scheme. Invest in funds that have been launched by companies that have a track record and are not new into the Indian market. 

Past performance. Many investors look at the past performance of a fund or fund house and assume that the fund will continue to generate the same return in the future as well. This is not always true. Therefore, do not invest in a fund just because it has done well in the recent past. Look at various factors like fund managers, the objective of the scheme, its portfolio and comparison with peers before making the final choice. Invest in funds that have done well across market cycles and investment cycles.
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