Investing in mutual funds is an excellent option for those who want to generate a secondary source of income. Every investor hopes to invest in a profitable fund, which helps them achieve their varied financial goals. However, specific factors help you evaluate which funds make for the best mutual funds investment.
There are basic factors that you need to consider for evaluating the same –
Returns accrued
While you choose the best funds, you should consider the returns accumulated by the fund. The performance of the fund, specifically concerning the returns on investment, is the most crucial parameter based on which the funds get ranked. As an investor, you should review the performance of the fun throughout three, five, and seven years depending on whether they are short, medium, or long-term funds. The thumb rule is to invest in funds which have beaten the benchmark index consistently to which the returns get compared. Also, compare them with peers and make sure they have fared reasonably over time.
Expense ratio
It is the amount investors should pay to the companies managing mutual funds in India and exchange-traded funds. It essentially represents the operating costs and the fees charged against the management of the fund. It gets calculated by dividing the funds operating expenses by the total rupee value of all assets in the fund. Other factors also play a role in influencing the expense ratio, be it high or low. Mutual funds generally carry higher expense ratios since they depend on human management, precisely why you must consider the expense ratio before investing.
History and the AMC offering the fund
Before finalizing the mutual fund schemes, make sure a trusted fund house actively manages them. Research about the Asset Management Company (AMC) handling the fund and consider other assets under the management. Ensure the fund house managing the fund has a good market reputation. A good AMC is one that has been in the investment industry for at least five years. This information instills the faith that the fund has been in the market for a long and has seen different market cycles, including rallies and slumps.
Financial ratios
When you invest in mutual funds, there are several significant risks involved, and precisely why it is necessary to understand the risk-return rate. This ratio marks the potential profits an investor can earn from every rupee invested. It also helps you compare the expected returns on the investment while calculating the risk amount you should undertake for making those returns.
