How to choose the right Mutual Fund?

Understand the Product

A mutual fund is a type of financial instrument made up of a pool of money collected from many investors to pool it together in one large pot. Mutual fund is managed by professional finance experts to help the rest of investors to invest. Fund managers will invest in securities like stocks, bonds, money market etc. The combined holdings of all these are known as its portfolio. The money that is earned will be given back to everyone based on each investor’s contribution (after deducting expenses). A mutual fund is an open end fund, in which it can issue an unlimited number of shares. It has a different nature than shares, which is a closed-end fund.

Steps on Picking the Right Mutual Fund

1) Check Your Risk Appetite

This would be the first thing to do before you start putting money into investment. If you are new in investing, you are advisable to do a questionnaire to check your risk tolerance. There will be a number of questions to understand your personal attitude at risk and nature of investment style. An aggressive investor or risk taker, is willing to risk more money for the possibility of better returns. Similarly, risk taker will face higher risk of losing the stakes when the market is not performing. Risk averse investor would choose the preservation of capital over the potential for a higher than average return.

As the investing principles say, high risk = high return.

2) Setting Expectation

Before choosing a mutual fund, the first thing to do is setting goals: the tenure of investment, capital, expected return, fund type, geographical factors etc. These factors will help you to trim down choices among the mutual funds. However, in the case of an unclear goal, you do not need to cut short the journey.

The goal could come from the purpose of investing. For instance, tuition fees, down payment for house or car, travel expenses, wedding, or even retirement plan. All these goals would be helpful in determining the time frame needed (whether this is a short term of 3 years, mid term of 5 years or long term of 10 years), the expected return by taking the time value of money.

3) Do Your Study

There are several parameters to take note of in picking the right mutual funds.
It could be risk expectation, risk tolerance, investment timeframe, funds focused geographical locations, historical performance, fund size, fund manager’s experience. Before you start investing, do your due diligence.

Below is some of the asset types in mutual funds:

Do Not Do This:

1) Don’t expect guarantees.

Funds usually come with a track record of historical performance. We need to bear in mind that past performance is no guarantee of future results. Do not assume that an investment will continue to do well in the future simply because it has done well in the past .

2) Don’t try to time the market

There is never a best time to invest in any mutual funds. We tend to be blind sighted when it comes to the market. When the market is going up, we might keep adding capital to the fund; when the market is going down, we might start selling the fund.

3) Ignoring the fees

Another common thing we might not notice is the long term impact of fees – expense ratios. A good expense ratio could be around 0.5% to 0.75%. It is considered high for ratios higher than 1.50%. The absolute fee may seem low compared to the expenses on a credit card, the fee is low and justifiable as long as the fund is performing above the market.

Key Thoughts:

Starting the investment journey may not be easy, but once you start investing and learning along the way, you will get to know more about investments, the jargons, the myths. Investing is not a sprint, it is a marathon. It requires time and effort to get a desirable return. After selecting funds, you will need to monitor the performance of funds on a monthly or quarterly basis and make strategy changes if required. You can set a price alert on the ceiling (high price) and floor (low price).