Picking the best mutual fund that suits your need can be tricky. Internet is full of articles that focuses on similar concepts that of picking a stock. The most discussed aspects when it comes to choosing the best mutual funds are risk assessment, fund types, loads, fees and fund style (passive vs aggressive etc.).
History doesn’t repeat in case of mutual funds.A short term investor
This is the most common wisdom that many short to medium term investors tend to believe. As per our analysis, though there are few exceptions, it still stands true by and large.
In this article however, we want to keep it simple and crisp.
The 4 most effective steps to choose the best mutual fund:
Answers of following questions:
- Know your investment style before picking the fund
- Consider the ‘β’ (Beta) of mutual funds
- Does expense ratio matter?
- Keep an eye out for fund houses’ online convenience and support
Our investment style should match with our choice of best mutual funds
It takes a long time to know what kind of investor we are. Psychology is a complex subject and adding to that are the different circumstances of life. Also, the stages of our life makes the assessment more complicated. (Parenting, partnering, family problems, health issues, job security, venturing etc.)
Though there is no ‘one-size-fits-all’ definition of assessing your investment style, often it boils down to one question.
There are plenty of online tools that can help you understand your investment style. Try this questionnaire from Motley fool. It’s trustworthy and backed up by data.
Also, as a second opinion, try this questionnaire from Thrivent Mutual Funds for example.
You should now be knowing your own investment style and type.
Consider the ‘β‘ (Beta) of best mutual funds
In a short sentence, Beta (ꞵ) is a number that describes the ‘sensitivity’ of a fund’s returns as compared to it’s underlying asset class/overall market.
There can be 5 main scenarios keeping Beta, ꞵ in perspective:
- ꞵ = 1: Ideally seen in index or ETF funds. Here, the fund is fully in sync with the index. Meaning, it’s perfectly correlated with the actual index (as it should be).
- ꞵ = 0: The fund has no connection with the overall market. So, price changes are unrelated to the other. To describe it in one word, it is ‘unpredictable’.
- ꞵ > 1: The fund is more volatile than the overall market. When the underlying asset value goes up, the fund tends to go up even more. Similarly, when the assets in portfolio fall, this fund will sink deeper!
- ꞵ < 1 but ꞵ > 0: The fund is less volatile than the overall market. Shifts in the stock market tend to move the security in the same direction, but to a lesser extent.
- ꞵ < 0: The fund is negatively correlated with the overall market. In other words, the fund behaves ‘opposite’ of the market. So, when the stock market goes up, the stock tends to go down and vice versa.
IMPORTANT NOTE: Be careful on sources of Beta. Different sources tend to give out different Beta values and it mainly because they compare different horizon of time. For short to medium term investment, it is best to pick the ꞵ value of past 36 to 48 months.
Does expense ratio matter to pick best mutual funds for investment?
Expense ratio is a highly debated topic. On one hand, some say that it diminishes the overall return of your fund. While on the other hand, experts argue that a well managed, less volatile fund for a fee is better than unmanaged fund with higher risk to reward ratio.
However, to keep the discussion short here, for a short to medium term [1 to 5 years] investment, expense ratio shouldn’t be a concern. However for a longer horizon, it definitely matters!
Keep an eye out for convenience and support of best mutual fund houses
Firstly, online apps, websites are no longer a luxury but necessity. Secondly, after the pandemic, it’s extremely crucial to consider a fund house that keeps up with technology and user interface.
Oh sure yes, every fund house says they have an “amazing app” and a “easy to manage website”. However, Can you withdraw funds on time? Can you swap funds quickly and close your investment when required? Can you automate SIP/SWP easily?
There have been instances of users complaining that the fund was easy to invest in but withdrawal was a nightmare.
So, keep an eye out for fund houses that are invested in digital platforms and technology innovations.
If you’re looking for stock investment and wondering which stock broker is best in India for 2021, We have a very good comparison here. Check it out.