If you are looking to invest, mutual funds are probably the first option for most individuals in India. Because they have a variety of options and the potential for long-term growth. However, before you begin, you must compare mutual funds India.
Comparison is the first and foremost step on the path when investing. With hundreds of funds available, and each promising a good return, it can be tough to decide which one suits your financial goals. Most investors only consider previous returns, but that doesn’t assure future prosperity. So, what do you compare? Read on to know in detail.
Investment Objective and Fund Type
The initial step when you compare mutual funds is to know the investment goals of each fund. They usually belong to various categories depending on their main investment objective. Each category has its own advantages and disadvantages:
- Equity Funds: These invest in stocks for growth. They suit investors aiming for long-term capital appreciation and persons who have a higher risk tolerance.
- Debt Funds: These prioritize capital preservation and yield stable returns by investing in bonds and government securities. They are more appropriate for conservative investors or persons with short-term goals having a low-risk tolerance.
- Hybrid Funds: These combine both equity and debt instruments to balance risk and return. Hybrid funds are ideal for those who seek a diversified method, balancing stability and growth.
Fund Performance and Track Record
Past performance can give you useful insights into the ability of a mutual fund to tackle volatility and generate returns over the long term. Although it does not promise future performance, it can indicate to you the way the fund has responded to market changes.
Look at the fund’s returns over 1-year, 3-year, and 5-year intervals. Compare these outcomes with the benchmark index as well as peer funds of the same category.
Key Points to Consider:
- Funds that outperform their benchmark and peers consistently over a few periods tend to be more trustworthy.
- Avoid focusing on short-term returns only, as they might not represent the fund’s actual capability.
Expense Ratio
The expense ratio is one of the important considerations when you compare mutual funds India, as it has a direct effect on your net returns. It is the annual fee the fund charges to manage the investment portfolio. Funds with lower expense ratios are generally more attractive since they allow more of your funds to remain with you.
| Fund Type | Expense Ratio Range | Impact on Returns |
| Actively Managed | 0.5% – 2.5% | Higher fees due to management services |
| Passively Managed | 0.05% – 0.5% | Lower fees and less management involved |
| Direct Funds | 0.5% – 1.5% | Lower expense ratio compared to regular funds |
Always pick a lower expense ratio fund if the performance is comparable to other funds.
Also Read: Mutual Fund Calculator: Your Guide to Smarter Investment Planning
Risk Profile
All mutual funds have some amount of risk. The risk depends upon what type of assets you are holding in the fund’s portfolio. As the exposure to equities goes up, the risk increases, but so does the opportunity for greater returns.
- Standard Deviation: Indicates the fund’s volatility, or the extent to which the returns differ from its average performance. A greater degree of standard deviation indicates greater volatility.
- Beta: The volatility of the fund compared to the overall market. A beta of 1 means the fund moves with the market, and a beta above 1 means it has more risk.
Exit Load and Other Charges
Besides the expense ratio, some mutual funds charge an exit load as well. This is a charge when you redeem your units before a specific period, which is usually 1 to 3 years. If you decide to exit from the fund early, exit loads can have a big impact on your returns.
When you compare mutual funds, you need to consider the exit load and other fees, particu larly if you are redeeming your investment before the specified time. Opt for funds that suit your investment horizon to reduce these fees.
Tax Efficiency
Tax efficiency describes how a mutual fund reduces its investors’ tax burden. When a fund generates large amounts of capital gains, you’ll pay more tax when you sell your shares. A tax-efficient fund reduces such taxes so you can retain more of your returns.
To determine tax efficiency:
- Turnover Ratio: A high turnover ratio shows frequent buying and selling of securities in the fund, which can generate more taxable capital gains.
- Taxable Distributions: Certain funds make distributions of capital gain and income to the shareholders. Verify how much of the returns on the fund are taxable in order to evaluate the tax effect of the fund.
Minimum Investment and Investment Strategy
There is a minimum amount to invest in every mutual fund. This is the amount you have to invest in the beginning in order to buy shares in the fund. Few funds have very low investment amounts, and few have higher initial investments.
Some points to note are
- If your investment budget is low, opt for funds that have low minimum investment levels.
- Check the strategy of the fund to make sure it aligns with your objectives. Some funds are for a more secure portfolio.
Also Read: 5 Best Steps of Investment Process | Why Investment Is Important Once You Start Your Career
Final Thoughts
Mutual funds are a very common investment option. But the right one has to be chosen after a careful study. Take time to compare mutual funds in India and select funds that fulfill your investment objectives and risk tolerance. Considering long-term performance and risk while choosing a fund is helpful to make a good decision. Do not go for short-term returns, as they can be challenging. A wise investment strategy results in increased financial growth and a powerful, stable portfolio.
FAQs
1. How is comparing mutual funds useful in risk management?
Comparing mutual funds helps in selecting the investment options that not only fit your risk tolerance and investment goals but also limit potential losses.
2. What are the common pitfalls to be avoided while comparing mutual funds?
Choosing a mutual fund solely on the basis of past returns is a mistake. Look at aspects such as risk, expense, and the extent to which the fund meets your investment goals.
3. How does one measure the performance of a mutual fund?
A good mutual fund is one that beats its benchmark over the long term. Returns greater than the benchmark suggest strong performance stability.
4. What is the best indicator of the success of a mutual fund?
Measuring a fund’s consistent performance against its benchmark, along with risk-adjusted returns, trendlines, moving averages, RSI, and support levels, helps assess its growth rate and stability.
5. Why is it necessary to check your mutual fund portfolio periodically?
Periodic review of your portfolio ensures that your investments are in line with your goals and risk tolerance while helping you to adjust your portfolio as per market changes.
Hello there, my name is Phulutu, and I am the Head Content Developer at Nivesh Karlo. I have 13 years of experience working in fintech companies. I have worked as a freelance writer at Policybazaar, Paytm Money, Investopedia, and others. I love writing about personal finance, investments, mutual funds, and stocks. All the articles I write are based on thorough research and analysis. However, it is highly recommended to note that neither Nivesh Karlo nor I recommend any investment without proper research and read all the documents carefully.
