How To Pick The Best Mutual Funds | Best Mutual Funds To Invest In 2021

Sometimes it happens that somebody tells you that you should invest in ABC mutual funds because this mutual fund had given a good return in the past and will give a good return in the future as well and if you listen to them and invest in that particular stock without researching or taking any decisions then what do you think you have you taken a good decision or a bad decision? because you made a big mistake here. 

Because, a lot of people will tell you that this mutual fund is really good, invest in it, you will get good returns and when you don't get a good return, it upsets you but you will rarely find people who will tell you that how you can choose a good mutual fund by yourself. If you can decide by yourself which mutual fund is good for you then you can choose a good mutual fund for yourself then you can make a good investment decision that will give you a good return in the future.

In this article, we will tell you about the 5 ways to pick the best Mutual Fund that can give you a good return in the future. Kindly read the full article so that you understand what things you should keep in mind while choosing to invest in mutual funds which can help to pick a good mutual fund. 

What are the Best Mutual Funds?

A mutual fund is formed when an asset management company (AMC) combines investments in a few individual investors and institutions to buy securities such as shares and bonds.

AMC has a fundraising portfolio, and fund managers. These are financial professionals who have a very good track record in investment portfolios. In short, mutual funds club their money from various investors to invest in bonds, stocks, and other similar instruments.

Mutual fund investors are assigned the unit that matches their investment value. Investors are allowed to buy or redeem unit funds only at the current asset value (NAV) price.

The NAV for a mutual fund varies daily based on the performance of the underlying assets. Joint funds are well regulated by the Securities and Exchange Board of India (SEBI), therefore, they can be considered a safe investment option. The biggest advantage of investing in mutual funds is that investors can diversify their portfolios with low investment value.

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Who Should Invest in Best Mutual Funds?

Shared investments should be considered as an investment option for everyone at some point in their lives. One of the best ways to achieve your goals is to invest in mutual funds. because you made a big mistake here Each mutual fund comes with certain goals that must be achieved. Therefore, whenever you plan to invest in mutual funds, you should make sure that your goals are in line with those of the fund under consideration.

Investing in SIP reduced the need to plan a total amount. So, you can start with your investment journey for a small fee. There are mutual fund plans that allow you to invest up to Rs 100 per month per SIP. This option is not available in most other investment options.

Every investment option comes with an associated risk. No investment is completely secure, including deposits. The risk level of mutual funds varies across species as it depends directly on the underlying assets. Therefore, you should invest in a mutual fund scheme only if you are willing to take the risks associated with it.

How to pick the best mutual funds for investment?

Many people make this mistake with mutual funds that they choose a mutual fund by just looking at its return and seeing its performance but they do not think about what was their purpose of investing in the mutual fund and what is the objective they want to achieve? Before coming to this, I would like to give you an example when you go out of your house with your vehicle YOU KNOW what is your destination because till the time you don't know your destination then you can't make a good decision you won't be able to choose the right path and whenever a person leaves their house without knowing their destination and starts their journey then that journey is not good. So, the same thing happens in the case of mutual funds.

Top 5 Ways To Pick Best Mutual To Invest in 2021

1. Identifying Goals 

As I said above same things happen in the case of mutual funds. Whenever you think of investing in a mutual fund you should have a goal and an objective, because of which you thought of investing in mutual funds. Think about the goal that you want to achieve shortly and that goal can be anything that can vary from your children's education to buying a vehicle to owning a house. For any such objective where you need money, you want the money, you have currently to get increased by 10% to 15%. After that, your objective and goal get defined after which you should think about investing, then your journey in mutual fund investing begins after which you should start thinking about how to choose a good mutual fund.

Once you have set a goal of what you want to achieve, say if you want to buy a vehicle. Now say I want to buy a house but I want to buy a house after 5 years. Now I know that if I want to buy a house for 50 lakhs, what should be my investment today, how you invest is also linked to your goal and also to your income and risk profile.

How does that work? If I use the same example here also let's say you want to buy a house then you need Rs 50 lakh after 5 years If I talk as of today on your risk profile then if you are a businessman you have a lot of cash you want to invest a lump sum, you have to invest all your money in mutual funds in one go, this is called lump sum investment. Now if you are a salaried employee and have month-to-month income in that position, how will you invest? In that case, you should go for SIP as your investment option in Mutual Funds and there are many benefits of SIP.

Like, if you invest money every month and if the market is very volatile then you get the benefit of volatility and receive an average price when the market goes up, you invest more and when the market goes down, you invest in a lesser quantity. First, the most important step is to define your goal with a defined goal, you should also know the duration of the investment, and with the duration, you should also know how you want to invest whether you want to go for a One-Time or SIP.

2. Risk Tolerance

The second important parameter is risk. Many people talk about it, and understand it but don't know how to apply it in their investment decision. It is very important to do risk profiling yourself. Your income can be volatile or fixed. You can have multiple reserves. Each person has a different income scenario due to different income scenarios, and each person has a different risk-taking ability.

If you are thinking of investing in mutual funds then you should know your risk appetite and whether you want to take more risk or less risk because according to your risk-taking ability, you should choose your mutual fund now if Your risk-taking ability is high. Now because of the higher risk, you are also expecting higher returns. Because of this, you are given the preference to invest in Equity Mutual Funds and if there too, your risk appetite is high, you can opt for small-cap. And if you want to take less risk, you choose large-cap.

But some people do not want to take any risk at all then debt funds are better for them so risk profile is the second most important parameter and it overlaps all your parameters even if your target is closely linked with risk. 

3. Competition with Peers

Now the third parameter is Competition with Peers. Now let's say you have defined your risk and your goal Assuming you want to buy a house after 5 years, your risk appetite is high and thus can take a little more risk so you chose a large-cap investment.

Once you decide you want to go for a large-cap investment, you will have more than 50 to 60 options through which you can invest in the large-cap investment, you should see the past performance of the last 5 to 7 years so that you get a true picture of how a mutual fund has performed in the past. Now the most important point says a large-cap mutual fund gave a return of 15% and a small-cap mutual fund gave a return of 25%.

Now the mistake is that people think that a 25% return mutual fund has performed better so I should invest here no, you chose a large-cap mutual fund based on your risk appetite, and if in large-cap a mutual fund gave a return of 15% then you need to compare it with the same category mutual funds. And its category would be large-cap mutual funds you will have to compare the return of large-cap mutual funds with the total large-cap returns and how this large-cap performed in comparison with its competitors. Did it outperform it or underperform it? 

4. Expense and Aum

The fourth parameter is related to expense and AUM. It is very important to understand the expense whenever you invest in a mutual fund because there can be many expenses here that investors don't know about like a particular expense here is called an expense ratio. The Expense Ratio is charged cause you have given your money to an asset management company that on your behalf would invest in securities. Now they might have some research costs and many other costs which would be charged to you in the form of the expense ratio and this expense ratio can vary.

Whenever you are going to invest in a Mutual Fund, you should know its expense ratio because, if the expense ratio is high then your return would be lesser and if the expense ratio is less, your return would be high. As such, you need to know that the expense ratio of the mutual fund you are going to invest in Second is Exit Load. In any mutual fund, if you take your money out before the pre-defined time then Exit Load is charged then if any contingency liability can come upon you in the coming time then you should have knowledge of exit load then your expectations should be clear that if you take out money before the set time then your return can get affected cause exit load will get charged.

Now, we will talk about AUM (Asset Under Management) Why is AUM important for you? If I talk about debt mutual funds In debt mutual funds, the more the AUM of the debt, the better it is considered to be. Now, why does that happen? Debt Mutual Funds invest in different instruments. Now assume that from one investment the money couldn't be recovered and if their AUM is big, they won't face any problem with liquidity and if there is no problem of liquidity, then the scenario of closing the mutual fund operation won't exist. 

Now If I give an interesting example here You would have heard of Franklin that Franklin had to shut its mutual fund's operations because, in the mutual fund's debt category, its AUM wasn't big when people started withdrawing money from there, the liquidity problem arose cause of which mutual fund couldn't return its money to its investors because of which they had to shut their operations. So as an investor, you should pay attention to an average, how much AUM is considered to be good for your selected category around which you should think of investing 

5. Past Performance

Last but not least, how should you judge your past performance. Many people consider just the last year as the past performance minimum you should look into 3,5 or 7 years of returns if you want to know the true picture other than this, the most important thing is If in the last 7 years, if the fund manager has changed and if yes, you should look at how did the mutual fund perform after this change cause your return heavily depends on the fund manager who decides on your behalf that which mutual fund you should invest in and you should never look at the past one year's return and make an investment decision.

Now, If you take care of these 5,6 things and do a good analysis then you won't have to depend on anyone to tell you, which mutual fund you should invest in, you can do your own analysis and choose a good mutual fund Instead of that if you depend on anyone else, the chances of making mistake is higher.

Conclusion

Define your goal, define your duration decide on the type of investment, whether you want to go for One Time or SIP then check its returns from the last 3 to 5 years check the fund manager's performance then check your risk appetite and choose a good mutual fund other than this, keep a check on expenses so that YOU KNOW the cost you are going to incur while investing If you take care of these things, you will hopefully be able to choose a good mutual fund and will be able to make a good return.