Mutual funds: Top 5 factors to look at while selecting an investment plan

Mutual funds investment for long-term is considered one of the best ways to accumulate wealth at a rate that can beat growth in inflation. However, there are some important factors that an investor must look at while choosing a mutual fund plan. 

We list out top 5 factors that an investor should look at while selecting a plan for one’s mutual funds portfolio.

1] Time horizon: Speaking on the importance of time horizon while selecting a mutual fund plan, SEBI registered tax and investment expert Jitendra Solanki said that one should be clear about for how much time he or she would invest in the mutual fund plan he or she is looking at. On the basis of that one should decided the category of fund. For example, if an investor is looking for long-term, then a small-cap fund can be a good option whereas investing for medium term, mixed-cap or mid-cap funds would be a better option.

2] Expense ratio: After selecting the category of mutual fund, one has to select a mutual fund plan as well. But, a mutual fund investor must know that fund houses charge an investor for managing its portfolio and this charge is called expense ratio. SEBI registered tax and investment expert Jitendra Solanki said that on an average expense ratio of a mutual funds vary from 1 per cent to 3 per cent. However, he said that one should investing in those funds, which has a expense ration of more than 2 per cent.

3] NAV: While selecting a mutual fund plan, investors are advised to look at the Net Asset Value (NAV) of the plan as well. Lower NAV may give higher return. But, while looking at NAV, an investor must look at the track record and fund management of the plan.

4] Sharpe ratio: Speaking on what sharpe ratio mean for a mutual funds investor; Pankaj Mathpal, MD & CEO at Optima Money Managers said, “Sharpe ratio in mutual funds is used to calculate the risk-adjusted return of a mutual fund plan. Basically, it informs an investor about how much extra return it would receive on holding a risky asset. It become quite handy for a potential investor if he or she has to choose any one of the mutual funds plans that have yielded almost same return to its investors in last few years.” However, he strictly advised mutual fund investors to use this mutual funds formula while comparing mutual fund plans of the same category.

5] Treynor ratio: Volatility has direct connect with one’s mutual funds portfolio and hence a mutual fund investor should look at the treynor ratio of a mutual fund plan while looking for an investment option. Jitendra Solanki said that treynor ratio in mutual funds inform about market volatility-adjusted return. Since, mutual fund investments are subject to market risk, one should check treynor ratio too while comparing a mutual fund plan. Solanki also maintained that the formula holds well for both lump sum and SIP investment.

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