How to choose a good mutual fund?

There are numerous mutual funds available in the Indian market. All this can be very confusing to an ordinary investor. So if you are looking to invest in a mutual fund but are confused as to how to go about selecting them, here are some tips that will help you in choosing a good mutual fund.

  • Long-term consistent performance: Has the fund been a consistent performer over a long term? By long-term I mean we are looking at a time horizon of 10-15 years. Has it managed to deliver good returns during good and bad times consistently? If yes, then this fund should be considered. HDFC Top 200, Franklin Taxshield are some such funds.
  • Fund management: Is the fund management headed by a reputed company? Has the company been in business for a long time? AMCs like Reliance, Franklin Templeton, HDFC and SBI have been in business for a long time. They have the necessary expertise to run the mutual fund business. So you know you are in safe hands.
  • Portfolio allocation: Does the fund have a higher mid-cap and small-cap bias? If yes, then these funds have higher risk than the funds with large cap bias. Funds like Reliance Growth and Franklin Prima have mid-cap bias and so are riskier than funds like Reliance Vision and Franklin Prima Plus.
  • Your risk profile: Can you withstand the risk associated with imid-cap and small-cap funds? If no, then stay away from such funds. If you cannot bear any type of risk then avoid equity fundgs completely.

Is PMS for you?

Want to invest in equities? Then you can invest in them either directly or indirectly. When it comes to indirect investment, you have two options: mutual funds and portfolio management service (PMS). Let us understand more about PMS and see if it right for you.

What is PMS? PMS is a customized investment service offered to big investors, who have a lot of money to invest. There is a fund manager to look after each PMS account. You give him a restricted power of attorney to invest money on your behalf. The investment is made on your behalf after taking into account your investment objectives, time frame and risk appetite. So a portfolio of a 28 year old with a small child, looking to build corpus for his child’s education is quite different from the portfolio of a 55 year old man looking to build retirement corpus.

Pros: Here are some of the advantages of PMS.

• Customized asset allocation: The portfolio each investor gets is determined by his risk tolerance level, duration for which you intend to remain invested and why you want to invest. E.g. if you want to invest your money in order to purchase a house within 2 years, your asset allocation will comprise mostly of debt instruments. But if you are planning to invest for your 2 year daughter’s marriage, you are most likely to get equity recommendations.
• 24×7 access: Most PMS service providers let you view your account online. You can analyze the performance of your investments and get information on your capital gains, booked/un-booked gains, updated value of your investments etc.
• Tax efficiency: The fund managers manage your investments in such a way so as to reduce your tax liability.
• Qualified fund managers: Most PMS services are run by professional fund managers who are experts. Thus you can rest assured that your money is in safe hands.
• Reduces your responsibility: You don’t have to spend time looking after your portfolio. Your fund manager is there to look after it and take decisions that will benefit you.

Cons: PMS also has its own share of drawbacks.

• Inability to compare the performance of fund manager: As most of the PMS services are not regulated, it is difficult for you to tell which fund manager has given you the best performance.
• Expensive: PMS managers charge a flat fee + a certain percentage of profits made by your investments. Usually it is the profits that make up the larger portion of the fund manager’s charges. This can work out to be expensive for you in long run.
• Not suitable for expert investors: If you have time and have good investment experience, then PMS are not for you. However for that you need to be emotionally detached. If not, then PMS is your best bet.

Is it for me?: Yes, if you have lot of money and not able to detach yourself emotionally from your investments and have no time to research before investing.

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