How to select Mutual Funds

Mutual funds are not a magic institution, which can bring the treasure to its millions of investors within a short span of time. All funds are the same, to begin with. But due to time, some exclude others. It all depends on the efficiency with which the fund is managed by the fund's professionals. Therefore, the investor has to be very careful in choosing the fund. He should take into account the following factors to evaluate the performance of any fund and then decide at the end which one to choose;

1.    Purpose of the fund: First of all, it has to look at the objective of the fund whether income-oriented or growth-oriented. Income-oriented securities are mainly supported by fixed interest to securities such as debentures and bonds, while growth-oriented equities are supported. It is clear that growth-oriented schemes are at risk compared to income-oriented schemes, and therefore, the returns of such schemes are not comparable with each other. The investor should compare the particular scheme of one fund with the scheme of another fund and do a comparative analysis. His purpose must match the purpose of the plan he proposes to select.

2.    Continuity of performance: A mutual fund always intends to give stable long-term returns, and therefore, the investor must measure the performance of the fund is at least 3 years. Investors are satisfied with a fund that shows a stable and consistent performance in comparison to a fund that performs well in one year and then fails in the following year. Continuity in performance is a good indicator of its investment expertise.

3.    Historical Background: The success of any fund depends on the ability of management, its integrity, periodicity, and experience. The integrity of the fund must be above doubt. A good historical record may be a better horse to place bets than new funds. It is following the adage "A known devil is better than an unknown angel".

4.    Capacity for innovation: The efficiency of a fund manager can be tested using innovative schemes introduced in the market to meet the diverse needs of investors. An innovator will always be a successful man. It is quite natural that an investor will look for funds that are capable of introducing innovations to the financial market.

5.    Investor Servicing: The most important factor considered is prompt and efficient servicing. Services like the quick response to investor queries, quick disposal of unit certificates, quick transfer of units, quick encashment of units, etc. will go a long way in making a lasting impression in the minds of investors.

6.     Market trends: Traditionally it has been found that the stock market index and the inflation rate move in the same direction while the interest rate and the stock market index move in the opposite direction. This sets the time for the investor to enter and exit the fund. The prudent investor should keep his eye on the stock market index, interest rate, and inflation rate. Of course, three is very scientific reasoning behind this.

7.    Transparency of fund management: Again, the success of mutual funds depend to a large extent on the transparency of fund management. In these days of investor awareness, the fund has to provide complete details about the operation of the fund. This will go a long way to make a lasting impression in the minds of investors for the preservation of the fund.

The wide range of products/services offered by various funds has made the investor quality conscious. He is now in a position to assess the quality of products offered by MF in the financial market. MFs cannot attract savings only by attractive advertisements. The cult of equity has spread to many small investors who have become very discerning in selecting mutual funds.