How to Research Mutual Fund?

For mutual fund investors, picking the right mutual fund to invest in seems like a daunting task.  Mutual funds are modern investment tools that invest a pooled fund into various securities to generate maximum returns for investors. It is enormously popular with investors, who want to take advantage of a well-researched, diversified portfolio managed by professional managers. However, learning which mutual fund scheme is the right one is not simple. You must conduct an exhaustive mutual fund analysis to find funds that suit your financial goals. You must assess several factors to decide whether a fund is good in terms of market parameters. In this article, we discuss the factors that are critical for your research. 

There are a few things that you should consider before researching mutual funds.

Factors to Evaluate Before Researching Mutual Funds

Before you start researching, you must define your investment objectives—whether you need the money for retirement income, to buy a house, or for your next vacation. Fulfilling each of these objectives demands different investment approaches and asset classes. Based on these goals, you can select different mutual fund categories.  

Someone planning a vacation next year will not invest in long-term or risky assets. Similarly, if you want the money for retirement purposes, investing in a low-return fund will not give the desired results. Hence, understanding your objectives will make the research process simple.

Next, you must check your risk appetite, which is your ability to take risks depending on how much return you want. High-risk funds will earn higher returns. But they will also incur significant losses during market downturns. If you don’t think you can handle high market volatility, you must choose a fund with a conservative investment approach. 

Once you decide what type of investment you want (stocks, bonds, etc.), you can begin the screening process. 

Modern brokerages, like Angel One, offer screeners that allow investors to research mutual funds by their categories and various other parameters. You can also use websites that let you perform independent research.

How to Conduct the Research?

You can begin by selecting the type of mutual fund. You can choose the style on the screener, and the screener will give you a list of all the funds in the category and various stats. You can then comb through the data to find the right one. 

• The fund manager’s investment strategy will guide where your money will be parked when you invest. If the fund’s investing strategy doesn’t align with your goal, it will not add value to your portfolio. Most screeners will tell you the fund’s type and composition so you can make an informed decision. For instance, if you are looking for a low-risk debt fund, you might select a fund company that specialises in it. 
• When investing for an extended period of time, you should know how much the fund has earned in the past. Looking at the past 10 or 5 years’ performance of the fund is a good indication of how the fund has performed over the years. 
• It is helpful in determining the fund’s stability and performance under different market situations. However, please keep in mind that past performance isn’t a guarantee of the fund’s future returns, but it is a good starting point. 
• Since most mutual funds are actively managed, another important point to add to your research is the tenure of the fund manager. This will help you understand whether the current fund manager is doing a good job. If the fund has generated good returns in the past but the fund manager is new, then the new manager is not responsible for its returns. It might change your perspective on the fund. 
• Mutual fund investing involves costs in terms of charges. There is an expense ratio when you start. It’s an ongoing expense deducted from the amount you invest by the fund company and paid towards managing your fund. SEBI has restricted the upper limit of the expense ratio to 2.5%. While it may not seem like a huge amount at first, over time, it can add up to a significant amount. You can avoid paying a significant expense ratio by selecting funds with lower costs.
• Additionally, there could be charges when you redeem the units, which can also lower your final returns, especially for low-return funds. It is preferred to select funds with low front and back load charges.
• Finally, consider the minimum investment amount. The minimum investment amount is the threshold and varies between funds. This will help shorten the list of your options by eliminating funds that don’t meet the minimum investment requirements. 

Wrapping up

Mutual funds, as an investment product, are highly regulated. They must publish reports on their holdings, financial conditions, objectives, investment strategies, risks, and other information. You should read through the fund’s prospectus carefully before investing. Also, once you invest, you will receive periodic updates on the fund’s performance and what is happening to your investment. You can check whether it is meeting your goals or not.

One might feel it is daunting, but researching mutual funds isn’t hard. Once you learn how to research mutual funds, you can look at the key points before making a selection. Using a screener tool, like the one in Angel One, you can set various parameters for your study. The app will help you shortlist the best investment options based on your criteria.

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