How to select an equity Mutual fund
There are more than 40 mutual fund houses offering more than 500 plus equity mutual fund schemes. It becomes a daunting task to select a mutual fund scheme that suits you. Nevertheless, if you follow these guidelines, it will help you make your choice simple.
First, select the right category you want to invest in. For example, if you are a long term investor and willing to take the risk, you might look at MF schemes that invest in small-cap stocks. But if you are risk aversive and long-term investor, large-cap dedicated funds might suit you better. Hence, you need to first decide your own risk appetite and investment horizon and then select the category of MF that suits your investment personality.
Once you have zeroed in on which category of funds you want to invest, the next step is selecting the mutual fund scheme that you want to invest in. To make this process easier you need to focus on 3 ‘Ps’.
Portfolio: Till the year 2017, many funds used to deviate from their fund objectives and investment style to generate extra returns. Nevertheless, it would entail extra risk, which as an investor you might not be in a position to take. However, after SEBI came out with rationalisation and categorisation of schemes now you can rely on the fund’s objectives and investment style. However, it is always better to look at a portfolio of fund you are investing in.
Profile: You should check the basic information about the fund such as expense ratio, exit load and size of the fund. The lower expense ratio is supposed to be better. Similarly, you should look at the exit load, again shorter duration is good for you.
Peers: Compare the performance with peers, i.e. both risk and returns over various periods and also check out the fund's outperformance against category over various periods.