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.

Dividend vs Growth: How to choose the best scheme

Rahul decided to invest in a mutual fund to fund his planned foreign holiday trip. His broker asked him if would like to opt for dividend or growth plan. Rahul was confused. He didn’t know what to do. So if you are in this position, then read on to find out more about these options.

When you invest in a mutual fund, your money is invested by the fund in buying assets like stocks, debt or gold. In turn, you get units in the fund. When the value of the underlying asset goes up, the value of the unit (NAV or Net Asset Value) also goes up, thus helping you earn profit. You can opt to withdraw this profit or keep on holding on to it and 10 per unit, then the value of each unit will now become Rs 40, once the dividend has continue to earn more profit.

If you need cash, then opt for the dividend option. This will enable you to withdraw the appreciation in the value of your units. However remember, the value of the units will fall by the amount of dividend declared. E.g. if you the NAV of the fund is Rs 50 and the dividend declared is Rs been paid out.

On he other hand, if you are looking to build a corpus for a long-term goal like retirement or your child’s education, then growth option is right for you. Here you can benefit from the compounded growth, thus helping you achieve your goal.

As Rahul did not actually need money, but was building corpus for his foreign holiday, growth option was suitable for him. Always find out the reason for investing before actually investing in a fund.

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