First Steps to Mutual Funds

How do I go about choosing a Mutual Fund scheme?

There are certain things you must keep in mind to help you choose the scheme:

Investment philosophy The investment objective of the scheme must match with your own objective. Thus if you are looking at capital appreciation over a long period of time, then you should consider a diversified equity scheme rather than a money market scheme. History of the scheme The scheme you are considering investments in should have a good track record and a considerable period of existence to prove its merit. Fund Size A scheme with a higher corpus tends to be more stable than a low corpus one and hence the former should be preferred for investments. But this should not be taken as a rule. Costs involved Most of the mutual fund schemes carry some loads and charges to cover their expenses. Such costs could be in the form of Entry/Exit loads that are charged to you when you invest or redeem from the scheme respectively. Schemes also charges expense ratios, which reduce your returns from the scheme. Schemes with lower expense ratios and entry/exit loads should be preferred. However, this should not be the primary basis of selecting a scheme for investments. Portfolio Turnover Portfolio Turnover means the number of times the fund manager churns the portfolio. Generally, the portfolio turnover is higher in an equity fund than a debt or a money market fund. A scheme with a very high portfolio turnover should not be preferred since it translates into higher costs through brokerage and other transaction costs. Performance against appropriate Benchmarks The performance of the scheme must be compared with appropriate benchmarks to verify whether the scheme has been performing well in the past. For instance in the case of Equity schemes the performance should be compared with the Sensex/ Nifty; in case of Income Schemes performance should be compared with 5 year AAA bonds and so on.