5 rules to select right mutual fund

Market is flooded with different mutual funds. For the beginner, it's a confusion over right mutual fund. Let us try to understand some basics of mutual funds and what criteria you should see while selecting mutual fund.

1. Past Performance

It is one of the most important criteria to select mutual fund. Although, it is not guarantee that the funds which have performed well in past will continue to perform good in future also. So, when I say look at past performance, I mean to look funds performance in last 4-5 years and not just last 1 year. Focus on funds that have delivered good returns consistently.

2. Expenses

If the company is managing your money in mutual funds, it will surely make certain expenses and it deserves some profit also; after all, it's their business. So, the company will charge few percentage of money from the total assets of the fund over a period of one year. One should avoid funds having high expense ratio and look for funds with low expense ratio.

Remember, even a slight change in expense ratio can reduce your profits considerably over years if you consider its compound loss.

3. Time Horizon

That means for how much time you can hold your investments in mutual funds. If you're investing for longer time horizon, say for your retirement, you can invest in equity mutual funds as they tend to perform well in longer time and not in shorter time duration.

But if you're looking for some short-term fund, say to pay your college fees next year or your loan EMI, then forget equity funds. Consider some debt funds like bond funds where safety of principal amount is more important than the returns.

4. Fund Manager Experience

This is very important point as ultimately it is this person who will take final decision on investing your hard earned money. Always consider the fund manager with at least 5-10 years of experience. You will surely not want a person who is fresher in the market. That will be like gambling. Research the fund's portfolio manager's past performance also.

5. Diversified funds

Never put all your eggs in one basked; at least when it is the question of your money. Imagine someone had invested all the money in IT companies in 1999 and the fate of his portfolio in year 2000 IT crash. So, don't invest all your money in one particular sector. Choose diversified equity funds to diversify your portfolio and risk.

In this article, I've discussed some basics of mutual fund that will help you to select right mutual fund of your choice. The above points needs further elaboration and discussion on many other aspects also. I'll write series of articles on mutual funds here.

If you've any doubts or queries on this article, please feel free to mention it in comments below.