Before selecting the best option of Mutual Fund, it is crucial for investors to identify their Financial goal. Once investors have identified their goals, then they may select the appropriate mutual fund product in sync with their short or long-term financial goals.
1. Tax Liability
For example, When an investor invests in equity mutual fund products then an investment period of more than one year is considered as long-term. And the investor has to stay invested for 3 or more years to come into the long-term investment category in a debt fund. Short-Term Capital Gains (STCG) in Equity Mutual Funds attract 15% tax, and Long-Term Capital Gains (LTCG) are tax-exempt up to ₹ 1 lakh in a financial year, thereafter the 10% LTCG tax is levied above this threshold. And on another side In debt funds, the STCG is taxed according to the applicable slab rate of the investor, whereas LTCG is taxed at a 20% rate along with indexation benefit.
2. Expense Ratio
When a fund house charges its investor for various costs incurred for managing any Mutual Fund Scheme it is called ‘Expense Ratio’.
For example, One fund has an ER (Expense Ratio) of 0.75%, which means that for every ₹ 100 invested in this fund, then an investor will have to pay ₹ 0.75 to the fund house. And his final returns may be lower by that extent. Therefore, the investor needs to see his gains against the fund’s ER. It is built into the fund’s unit price, which is its NAV. There is also a difference between regular or direct plans of the same fund.
3. Funds for Investment
Investors have to prefer such funds that fit their criteria, such as return consistency, management efficiency, performance against a benchmark, zero or minimal exit load, etc.
For example, An investor may invest in a fund that has consistently performed better in the past, has a fund manager with a proven track record, has consistently outperformed its benchmark, and there is zero exit load after one year. It is well said that past performance should not be the only deciding criterion as it can’t guarantee equal or better returns in the future.
4. Optimally Diversification
When selecting mutual funds, avoid putting all money in a single mutual fund product. Investors need to try to diversify their portfolio by investing across different mutual fund categories and into different schemes within the same mutual fund category. In also addition the optimal diversification can help reduce the investment risk to a great extent.
5. Choose between Active, and Passive Investment
In passive mutual fund investments, the fund manager follows the underlying index, and the fund’s return is usually in line with the returns offered by the underlying index. In an active mutual fund investment, the fund manager is directly involved in deciding the structure of the investment portfolio and the scrips that it consists of. The fund management cost and expense ratio are higher in an active mutual fund than a passive fund. Therefore, if an investor isn’t looking for an aggressive return and merely intend to mimic the performance of an index such as Nifty or Sensex, then the investor may choose a passive fund. But if the investor is looking to outperform the index and ready to take a little more risk, then he may go for active investments.