In this article we cover

  • 1) How to Choose Best Mutual Funds?

  • 2) Factors to Consider While Investing in Mutual Funds

One of the biggest struggles of mutual fund investors is not knowing how to choose mutual funds. Despite so much information on the internet, the struggle has only grown.

The reason behind this struggle is that investors pass on the complete responsibility of selecting mutual funds on third party websites and apps.

These websites and apps provide biased information based on outdated research methodology. Some of these methods have not been updated since 1980s.

So the process behind choosing mutual funds is 40 years old! No wonder mutual fund investors are stuck with mediocre returns. But you can avoid this by learning how to pick mutual funds yourself.

How to choose mutual funds

Let us understand how to choose mutual funds.

How to Choose Mutual Funds?

Majority of investors choose mutual funds based on their past performance.

But we all know that past performance is not a guarantee of future performance. Mutual funds themselves give us this disclaimer!

Other investors choose mutual funds based on the fund manager. But what happens when your star fund manager joins another fund? Will you keep changing your funds?

Obviously No.

So, how do you choose mutual funds?

When you buy mutual funds, you are buying a basket of underlying stocks. So the most logical thing to do is check the quality of the underlying stocks.

  • If the underlying stocks are of great quality then that mutual fund is good.
  • If the underlying stocks are of poor quality, then you should avoid those mutual funds.

Sounds simple, right?

Unfortunately it’s a lot of work.

There are two levels to choosing mutual funds:

  • Selecting ‘Sahi’ mutual funds
  • Investing in quality mutual funds at the ‘sahi’ time.

RankMF’s Giga Trading Engine evaluates over 2 Crore data points everyday! Some of these data points include:

  • Strength of the balance sheet.
  • Profitability
  • Industry of operations
  • Size of business and opportunities
  • Efficiency of business and more!

By analysing such 2 crore fundamental and market data points, the engine provides 2 outputs:

  • Stock Rating Indicator: To assess the quality of the underlying portfolio of stock holdings.

  • Margin of Safety Indicator (MosDEX): To assess the fair value estimate before investing in a mutual fund

The stock rating indicator checks to see if the fund holds fundamentally good stocks. RankMF’s Stock Rating Indicator is fully automated and real time stock rating indicator which updates basis daily news feed and market events.

Did you know that as per RankMF research RankMF research
So, what is the right way to identify the best mutual funds? How could one tell whether a fund will perform well in the future? We know there aren’t any guarantees. But we know one thing a fund is only as good as its portfolio, right? Then why not study the stocks a fund holds in its portfolio?Read More
SBI Small Cap Fund is poorly rated due to its low quality of stock holdings. Can you guess its rating on other financial websites? It’s a 5-star rated fund!

But only knowing which mutual fund to invest is not enough. We also need to know the correct time of investment.

This problem is solved by RankMF’s MosDEX. The MosDEX score tells you whether it is the right time for investment.

  • MosDEX score above 105 means the fund is being offered at a massive discount. This means that you can double your investment amount.
  • A MosDEX score between 90-105 means that you can continue your regular investments.
  • MosDEX score between 80-90 means you can skip equity investment and invest in a liquid fund instead.
  • A MosDEX score below 80 means you should sell the fund and switch to a better fund.

RankMF successfully solves the two biggest hurdles faced by mutual fund investors - selecting quality funds and investing at the right time. Find out if your mutual fund is ‘sahi’ now.

Apart from these fundamental factors, you should also consider the following while investing in mutual funds.

Factors to Consider While Investing in Mutual Funds

Your investment decisions should be based on detailed analysis of - investment goals, risk appetite and investment horizon.

  1. Investment Goals: Before investing, investors must analyse their investment goals. Common investment goals can be:

    1. Planning for retirement
    2. Planning for your children’s education
    3. Buying a house
    4. Saving tax
    5. Safeguarding capital

    Once you set your investment objective, you should analyse your risk profile.

  2. Risk Appetite: Risk appetite is knowing how well you can tolerate market ups and downs. Knowing your risk appetite helps you decide on the type of fund to invest.

    • Low-risk investors: Investors who get worried and lose patience when markets fall are known as low-risk or conservative investors. Such investors should choose debt funds or large cap funds.

    • Medium-risk investors: These investors have a balanced approach to investments. They are willing to take calculated risks. Multicap, balanced funds, medium term bond funds are perfect for medium-risk investors.

    • High-risk Investors: Investors who do not lose sleep when markets fall are known as high-risk or aggressive investors. Midcap, small cap, sectoral and thematic funds are perfect for high-risk investors.

  3. Investment Period: Knowing your investment time horizon is critical when choosing mutual funds.

But you need to have a collected look at all three aspects - risk, goal and time horizon.

For example: Even if you are a low-risk investor with a long time horizon, you should still stick to large cap or balanced funds. Simply having a long time horizon doesn't mean you should invest in midcap or sectoral funds.

Similarly, if you are a high-risk investor but with a short time horizon then debt funds or large cap funds would be more suitable for you.

Final Thoughts:

As an investor, before you invest in any fund you should check the following:

  1. Is your mutual fund sahi?
  2. Is the time sahi?
  3. Does your risk profile match the fund’s risk?
  4. Will investing in the fund help you achieve your financial goals?
How to Choose Best Mutual Funds

A ‘Sahi’ mutual fund should fulfill all the above criteria. To know whether your fund and investment time is Sahi, open a FREE RankMF Account today!

Frequently Asked Questions by investors:
What is the expense ratio?
Expense ratio is the total fee charged by the AMC for the management, administration, distribution and other likewise services offered by the mutual funds.
What are the 3 essential factors to look while choosing a mutual fund category?
Investors should analyse these 3 factors - investment goals, risk appetite and investment period while choosing a mutual fund category.
What is a benchmark index?
A benchmark index is a standard index against which a particular scheme is evaluated. It helps to track the performance of a particular fund.