Most of us do not have time to follow the market and research value stocks to invest. Post rally of 2006-2008 in stock market most of us started becoming aware and interested in it. We all want to invest in stock market to get our share of profits from it but either we do not know about stock market investment or we do not have time to follow the market to make the best out of it. Thus the most effective alternative, we all opted is MFs. Most of us select MFS based on recommendation by friend/family or based on prior performance, If you are one of them please read the below pointers to select any fund for investments.
Fund Sponsor: Experience and background in managing mutual funds be it in India or overseas is must for Fund sponsors. Companies like Franklin Templeton, Black Rock etc are the great International MF players like in India HDFC and ICICI are at present.
- Fund Manager: Fund Manager’s are the individuals or team who makes the decision about investments of the fund and determine the plan in terms of its fund allocation among different instruments. He must be experienced, which is best reflected in the returns he has generated on funds previously/currently managed by him.
- Investment Objective: Every fund has its own investment philosophy and strategy. While some funds are aggressive and make regular buy and sell to get the benefit of market inefficiencies, others are passive which try to invest in value stocks to get better returns in longer term. Investors must choose the fund that best reflects and matches his own investment philosophy and time span.
- Fund Type: Funds are either open-ended or close-ended. Open-ended funds are available for subscription throughout the year. Investors have the flexibility to buy or sell any part of their investment at any time at a price linked to the fund’s NAV. Close-ended funds begin with a fixed corpus and operates for a fixed duration. The fund is open for subscription only during a specified period. When the period terminates, investors can redeem their units. Close-ended funds may be listed on the stock exchanges to impart liquidity to the investment.
- Fund Category: Mutual funds offer three different categories. Debt funds seek to provide a regular source of income by investing in fixed income securities like debentures and bonds. Equity funds aim to grow money over time (i.e. capital appreciation). Here, the investment focus is mainly on stocks/shares. Historically, stocks have outperformed other asset classes like bonds, fixed deposits, gold, and real estate over the long term – 10 years. Balanced funds attempt to maintain a balance between fixed income securities and equities in pre-determined ratios like 60:40 equity – debt for instance. The investor must invest in mutual fund categories, which meet his criteria in terms of need for regular income, capital appreciation, and safety of principal.
- Fees and Charges: Asset management companies (AMC) charge a fee for managing investor monies. In other words, your mutual fund deduces charges and fees from the net asset value (NAV) of the fund. As an investor you must be aware of the fees and charges of the AMC. Two schemes with more or less similar performances would generate different returns if one of the two schemes charges higher fees.
- Exit load: An investor may be required to pay a load either at the time of selling the units. Again, the returns of two similar performing schemes may vary depending on the load charged by the scheme to the investor. In most of the case its 1% if redeemed within 1yr but it varies from AMC to AMC.
- Tax Implications: The investor needs to understand the tax implications before investing in mutual fund schemes. Currently, if an investors exits (sells) his equity oriented fund prior to the completion of 12 months of his holding period, he will be liable to pay a short-term capital gains tax @ 15% + 3% education cess. However where an investor exits (sells) his equity oriented fund after the completion of 12 months of is holding period, he will not be liable to the payment of long-term capital gains tax. The dividend earned on a equity oriented is also exempt from tax. Tax-saving funds (commonly known as Equity Linked Saving Schemes (ELSS)) offer a tax benefit to the investors under section 80C of the Income Tax Act 1961, where an investor is eligible for a deduction for sum upto 100,000.
- Investor Service and Transparency: Services offered by mutual funds (MFs) may vary across funds. Some MFs are more investor friendly than others, and offer information at regular intervals. For instance, some funds disclose the expense ratios, an important criterion for fund selection, once a year, some disclose it once every 3 months, while a few disclose it every month.
- Fund performance: Every fund is benchmarked against an index like the BSE Sensex, Nifty, BSE 100, BSE 200, CNX 500, etc. The investor must track the fund’s performance against the benchmark index. He must also compare its performance with other funds from the same category. He should also see the fund’s calendar year performances over the years.