5 Factors to be taken into Consideration while selecting a Mutual Fund
Investing in Stock Market Notes
Table of Contents
5 Factors to be taken into Consideration while selecting a Mutual Fund
1) Investment objective
This the most important factor in selecting any mutual fund. The fund so selected must fit into the investor’s overall investment objective. For example, if an investor want stable and regular dividend income then he must select regular dividend paying debt and equity funds not growth oriented funds.
2) Past risk-adjusted returns
Past performance of the mutual fund must be looked into before selection. If a mutual fund scheme giving a risk adjusted return of 15% to 20% in previous 3 to 5 years, then it can be considered for investment.
3) Experience and longevity of the Mutual fund management team
A stable fund management team will perform better over a longer period of time as compared to those whose management team changes frequently. The main reason for this is a stable fund management team develops consistency in investment strategy.
4) Expenses ratio
Expense ratio is a key consideration while selecting any mutual fund. At the time of buying mutual fund units there is no entry load, but if you exit from the fund before the stipulated period of time, exit load will be levied which may range from 1% to 2%. Also transaction cost such as operational costs, administrative costs, marketing costs etc. are debited from the NAV of the fund. These expense ratios must be compared with the return before selecting any mutual fund scheme.
5) Tax implications
Short term Capital gain Tax @ 15% levied if equity funds are sold before a period of 1 year or debt funds sold before a period of 3 years. Also LTCG exceeding Rs. 1,00,000 will be taxable @ 10% without the benefit of indexation. Tax implications must be taken into consideration before making any investment on mutual funds.