How to select Best Mutual Funds?
Introduction
Mutual funds are one of the most effective ways to enter the stock market without directly investing in individual stocks. Many investors, especially beginners, find it challenging to select the right mutual fund due to the various options available. In this blog, we will explore the different types of mutual funds and the best way to choose one according to your financial goals.
Misconception about Mutual Funds
There are over 5,000 mutual funds available today. Which one is suitable for you? Let’s find out.Many people select mutual funds based on their last year's returns. For example, if a fund gave a 50% or 60% return last year, they assume it is the best fund. No, that is not the right approach!
Step 1-Check Annualized Returns
Looking at just one year’s return is not enough. You need to check the fund’s performance over a longer duration—3 years, 5 years, or even 7 years.Why? Because sometimes, a mutual fund manager gets lucky with one stock, which suddenly performs well and boosts returns.
Step 2-Check-Rolling Returns
Let’s say today is September 2024, and we want to check rolling returns for the last 3 years.We calculate: Returns from Jan 1, 2021, to Dec 31, 2023 ,Returns from Jan 2, 2021, to Jan 1, 2024,Returns from Jan 3, 2021, to Jan 2, 2024 And so on… This method gives us multiple rolling returns over different periods. It helps identify whether a fund’s returns are consistent or highly fluctuating.
Why Rolling returns important
Fund A: Gives 25% average annual return, but fluctuates between 0%, -5%, 50%, 30% and Fund B: Also gives 25% average return, but stays within 22%, 23%, 28%, 27%. Which one would you choose? Obviously, Fund B, because it is more consistent and stable.
Step 3-Check-Mutual Funds Using AUM and Returns
Let’s compare Quant Small Cap Fund and Nippon India Small Cap Fund: Quant Small Cap AUM: ₹25,535 crore and Nippon India Small Cap AUM: ₹61,000 crore and 5-year annual return of Quant is 28% vs Nippon India: 22% Though both funds performed well, Quant consistently stayed closer to its average return, while Nippon had lower fluctuations but lower returns. This analysis helps decide which fund aligns better with your risk appetite.
Disclaimer
This article is for informational purposes only and does not constitute financial advice. Investing in stocks involves risks, including the loss of principal. Always do your own research or consult a registered financial advisor before making investment decisions.
