The ‘Mutual Fund Sahi Hai’ wave has caught the nation in the last 3 years and there is a clear growing awareness & interest in Mutual Funds among people. More and more investors are trying to find out about this investment option and are actively searching answers on How to pick top trending mutual funds? In this article, we give you certain tips that will help you in ascertaining and picking up top performing mutual funds in India.
Investing in mutual funds is simple but the bigger challenge is to find the top mutual funds to invest. Picking the best-suited mutual fund for yourself from the top-ranked ones involve a lot of attention to details like choosing the top performing mutual fund that focuses on offering higher returns on investment with a tap on the risk element. Mutual funds offer a bigger bait and investors perceive them as big winners when they strategically enhance their investment portfolio.
Once you have decided to incorporate top performing mutual funds in your investment portfolio, there are certain parameters that you need to analyze like mutual funds’ performance history, the fund manager, the expense ratio report, etc., before picking the top performing mutual fund. Let us see the best ways to consider picking up top mutual funds.
• Define Financial Goals:
One of the golden thumb-rules while investing in mutual funds is to start with defining your financial goals and ascertaining your financial expectations from the mutual fund scheme. Defining your financial goals will help you to put forth clear roadmap and timelines for achieving your target. Thus, even if you are focusing on top mutual funds to invest your money in, there are certain questions that you need to ask yourself.
o Do I want returns in a short duration or am I looking for long-term gains?
o Whether the purpose of the investment is for fulfilling a dream like children education, marriage, etc. or for creating a retirement corpus?
o How quickly do I want my money back?
Thus, there are these and many more other questions that you must ask yourself while defining your financial goals.
• Define your Risk Tolerance level:
The next very important factor that you must focus before investing in top performing mutual funds is your risk appetite. Mutual funds are subject to market risks so defining your risk appetite and tolerance level will help you in being mentally ready for the upcoming challenges caused due to market fluctuations. Investors can set their risk tolerance bar by answering the below-stated questions:
o Are you comfortable with market volatilities?
o Do you want higher returns or are you comfortable with conservative returns?
o Can you cope with the devaluation of your investment portfolio caused due to market fluctuations?
o Are you ready to take the plunge in the high-risk investment zone?
• Defining fund type and size of fund:
Before investing in top mutual funds, it is important to define the type of returns that you are expecting from top ranked mutual fund. Every investor aims for capital appreciation so having a plan to invest will help in increasing the potential of your investment portfolio. For example: if you want regular income from your investment then investing in income funds is suitable but if you have a higher risk appetite and are aiming for a distant financial goal then investing in a long-term Equity fund will fetch good returns as these funds usually aim for capital appreciation. Pre-determining the size of the fund is equally important as it will diversify the portfolio and even the risk associated with it. Identifying proper fund type, its instruments and size of the fund will help in achieving investment goals in a pre-determined manner and timeframe. Similarly, it will help you to plan better to overcome potential market risks and help in clearly identifying the top mutual funds to invest.
Mutual fund companies charge fees in various forms for offering their services to the investors and they make money from the charges they imply on the investors. Asset Management companies charge in the form of front-end load, back-end load, administrative charges, level-load fees, etc. It is necessary for the investor to keep a close eye on the fees and management expenses charged by the asset management company usually referred to as the Expense Ratio. Expense Ratio refers to the various operating expenses charged by the Asset Management Company. In case, you have any queries related to fees, we recommend getting them clarified before selecting the top mutual fund.
• Type of Management:
Before selecting the top ranked mutual fund, it is important for the investor to determine its portfolio management. The mutual funds in India are managed in two manners viz. Active Management and Passive Management. Both types of management have their own set of advantages and disadvantages which investors should carefully look into and select the preferred type. Following are certain key differentiating points between both the types:
o Actively managed funds charge higher fees as compared to passively managed funds.
o Active funds work to surpass the performance of the index funds while passive funds duplicate their performance
o Passive funds are well diversified as compared to active funds
o Passive funds are not traded frequently so they usually do not create huge taxable income, so this fund is preferred by investors with conservative risk appetite
• Study of the Past Trends:
Before investing in top performing mutual funds in India, one of the most important steps is to carry out extensive research and evaluate the funds’ past performance. Evaluating a fund's record of accomplishment will help in identifying its performance potential. Every mutual fund investor must ask themselves the following questions to gain clarity on the performance of the mutual fund:
o How did the fund manager perform i.e. whether the portfolio manager’s decisions can generate better returns?
o Did the fund deliver consistent results or were they volatile?
Seeking answers to the above questions will help in getting an insight into the performance of the fund managers. Apart from tracking the decision-making potential of the fund manager, it is also important for the investor to track the past trends/performance of the mutual fund before investing in the fund.
• Tax Implications:
It is important to have first-hand knowledge about the tax implications, the funds will attract. There is a different tax structure for mutual funds depending on the type of mutual fund and the period of investment. Investing for long-term for more than 12 months in a listed equity fund is exempted from the income tax ambit, however; investing in an unlisted equity fund for more than 12 months attracts tax at 20% with indexation benefit. Similarly, the short term listed equity funds attract a 15% income tax. While investing in debt mutual funds for long-term attract an income tax rate of 20% with indexation benefit and for short-term, the income tax rate is levied as per slab rate.
Investing in mutual funds is simple and easy as long as you are done with the most ardent part of mutual fund investing i.e. finding top mutual funds to invest. Therefore, it is always advisable to take expert advice from the professionals at IndiaNivesh who will offer their expertise to help you pick top mutual funds to invest and raise the bar of your investment portfolio.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.