Imagine you lend money to your brother when he says he will invest it for you and guarantees its double in 7 years. Putting your trust in him you give him the money. Now when you do, won’t you be curious about where the money was put? You will want to know whether it is actually profitable or not, and if the company and its managing team are actually competent and reputable?
The thing is, sometimes we don’t care to do this with the mutual funds we invest in. It’s true that researching a mutual fund regularly can be grueling, but good research pays off. You will know whether a mutual fund is suitable for you or not and if you should invest in it. In this video/blog I will show you how to analyze a mutual fund.
Important stuff to remember when analyzing
Let’s start with three key principles: Consistency, Diversification, and Personalization.
Consistency: Mutual fund performance cannot be overemphasized without consistency. Consistent returns over time indicate a fund’s ability to navigate market ups and downs successfully.
Diversification: Imagine if all your investments were in one sector, and that sector took a hit—your entire portfolio would suffer. A diversified mutual fund spreads its investments across different assets, industries, or even geographical locations. This way, if one area underperforms, the others can cushion the blow. Beginners should prioritize funds that offer broad diversification to protect themselves against market volatility.
Invest Based on Personal Factors: Finally, and most importantly, your investment should reflect you—your age, income, risk tolerance, and financial goals. Don’t invest just because someone else recommended a fund. What works for them might not work for you. If you’re younger with a steady income, you might be more inclined to take risks. If you’re nearing retirement, you might prioritize stability. Align your investments with your personal situation to ensure they serve your long-term goals.
Now that you know what key features to look out for in mutual funds, let’s move on to how to analyze them and use them to invest in an appropriate mutual fund.
How to analyze and choose a mutual fund
Now that we’ve covered the basics, let’s move on to how to analyze and choose the right mutual fund. Here are essential points to consider:
Records: Mutual fund success often hinges on the fund manager’s expertise. Look at their track record—how long have they managed the fund? How have their previous funds performed? An experienced fund manager with a history of consistent performance can be a positive indication that the fund will continue to do well.
The Asset Management Company (AMC) manages your funds. Just like with a fund manager, it’s very necessary to consider the AMC’s reputation and history. An AMC with a strong track record and sound governance practices is more likely to manage funds effectively, providing security for your investment.
Fund History: Mutual funds’ history tells you how it performed in different market environments. Funds with a long and successful history have proven their resilience through various market cycles. For beginners, choosing a fund with a solid track record can provide peace of mind.
AUM for Small-Cap Funds: If you’re considering investing in small-cap funds, pay attention to Assets Under Management (AUM). While large AUM is generally positive, small-cap funds can suffer from price fluctuations and liquidity issues. A smaller AUM in this case might be more manageable, ensuring that the fund can effectively navigate the small-cap market without too much volatility.
Expense Ratio: The expense ratio is the annual fee you pay to the fund for managing your investment, expressed as a percentage of your assets. A high expense ratio can eat into your returns, especially over the long term. Beginners should look for funds with lower expense ratios, as this allows more money to stay invested and grow.
Rolling Returns: Rolling returns are the average returns of a mutual fund over specific periods, calculated at regular intervals. These returns help assess the fund’s performance consistency over time, offering insights into how it handles market fluctuations. For beginners, this metric helps identify funds that consistently perform well.
Diversification Within the Fund: Besides diversification across your entire portfolio, consider how diversified the fund itself is. Does it invest in multiple sectors, countries, or asset classes? The more diversified the fund, the less vulnerable it is to market shocks in any single area.
To wrap up, choosing the right mutual fund as a beginner doesn’t have to be daunting. Focus on funds that offer consistency, diversification, and align with your personal financial situation. Carefully analyze the fund manager’s record, the AMC’s reputation, the fund’s history, AUM for small-cap funds, and the expense ratio. By doing so, you’ll be well on your way to making smart investment decisions that help you achieve your financial goals.
Thank you for reading, I post a blog every Friday so stay tuned every week!