Home » Research » Investment Knowledge Bank » Select Top Performing Mutual Funds

How To Select Top Performing Mutual Funds

How it helps?
  • Zero maintenance charges
  • Zero fees for demat account opening
  • Volume based brokerage
Reach Us

Publish Date: November 18th, 2019

By: Sandhya Kannan, Head – Content

Mutual Funds are vital investment instruments for investors since the range of schemes offered can be useful for investors with all kinds of financial goals. From long-term to mid and short term, mutual fund returns can help one cater to various financial needs.

But how does one know which is the best mutual fund scheme for an investor?

1 - What are your Goals and Risk Tolerance Level?

Whether the objective is to save for retirement or buy a home, every investment is made with a goal identified by the investor. Once the goal is identified, an investor must figure out what is their risk tolerance. If an investor wants high returns, then the risk appetite of their portfolio will have to high too. Hence, the investor must know whether they are ready to tackle the swings of the market or not. The time frame also plays a big role in determining the effects of risk on the portfolio. If the investment is long-term, then the portfolio will be able to balance out and mitigate through the risks.

2 - What is the type of fund?

If capital appreciation is the goal, then growth funds are the way to go, offering a fair amount of volatility and risk but giving good returns in the long term. This fund allocates a high percentage to common stocks increasing the risk as well as returns. The desirable time frame of holding this fund is between 5 to 10 years.

Income funds are a good option when an investor wants less risk and volatility. With the focus laid on government bonds and debt instruments, these funds are less prone to market risks. Another factor that differentiates groups of funds is the time frame of holding them. It can be held for long, mid and short term goals in mind.

Read more: Different types of stock brokers

3 - Passive vs. Active Management

In an actively managed fund, a fund manager follows up on the progress of the securities and instruments, deciding which ones to include in a scheme. The managers of these funds conduct thorough research which makes their charges higher than passively managed funds. The expense ratios can vary from 0.6% to 1.5%.

Passively managed funds are index funds which duplicate the movements of a benchmark index. The expense ratio of these funds can be as low as 0.15% and the assets of the fund are not traded unless there is a change in the index itself.

4 - Evaluate past performance

When you have a list of schemes you’d want to invest in, historical research is the next step in finalising the one. An investor must have answers to questions like:

  • Were the returns consistent with the general market returns?
  • How dramatic were the variations in returns through the year?
  • Did the fund give unusually high turnovers, becoming a larger tax liability for the investor?
  • Has the fund manager shared relevant insights with investors like factors affecting the fund’s performance?

5 - Size of the fund

After this analysis, an investor must study if the fund is too big to live up to its investment objectives. There are situations where the fund tops in assets and is forced to shift its focus to other securities. This changes not just the risk appetite of the fund but also puts an investor’s goals on the backseat.

Also read: