Here's how to identify best mutual funds to invest in

Investing in mutual funds can be a scary and overwhelming task, especially if you are new in the world of stock market investing. Why do you need to invest when you can keep your money safe at home or in an FD, your grandmother may have asked. Once you browse through the internet, you might wonder which of the numerous mutual funds to invest in and how to decide which one is the best. So, here is a list of things you should know that will simplify your mutual fund investing journey:  

FIRST, WHAT IS MUTUAL FUND INVESTING? 

If you are someone who believes: 'Don't put all your eggs in the same basket', investing in mutual funds is a better scenario for you. 

Investing in mutual funds is a system in which people invest a sum of money every month in a common fund. The fund invests this collected money into shares of multiple companies, debt securities, or both depending on the goal of the mutual fund. A mutual fund manager is responsible to manage the fund's money and generate awesome returns for us. He looks like this: 

So, the mutual fund will hold the actual ownership of the shares. So what do we own? We get certain 'units' of the mutual fund in exchange for our money. When you check a website to find out which mutual fund to invest in and see a % return against each mutual fund, this is basically the synergetic growth (or the return on investment) that the mutual fund has achieved thanks to the fund manager.

SO WHERE TO INVEST?

When investors want high returns and are ready to bear high risks, they can invest their money in say an equity mutual fund. If some investor wants a definite return and doesn't want to take a lot of risks, he can invest in debt mutual funds. For eg: Say Smriti and her friends want to invest in a certain Kotak Equity Mutual fund. Now, Smriti & her friends will receive units of Kotak's Equity MF and Kotak’s fund managers will invest this entire money into multiple equity shares available on the stock market, instead of one particular stock.

Say, Nirmala wants to invest in debt mutual fund. So Nirmala will receive units of Kotak's Debt Mutual Fund and its fund managers will invest this money into a variety of debt instruments like government bonds, corporate bonds, and bonds issued by public sector banks and public financial institutions. Say, Mamta wants to buy hybrid mutual funds which is a mix of equity and debt. There will be a separate fund that will invest in both these securities and she will receive units specific to this MF. 

NOW, HOW TO SELECT THE BEST ONES?  

People usually look at the past returns of the MF and invest in the one that has historically given higher returns. But this cannot be the sole criteria when deciding which MF to invest in.  

So check for:

1. Goals, Duration, and Time: Your goal will decide where, how much, and how long you will invest. You will probably invest in Liquid funds or debt MFs if you want to buy a car in the next 3 years. Whereas if you want to buy a home in the next 10 years worth Rs 50 lakhs, you might want to invest in Equity MFs since that has a larger risk and return potential. You will also invest aggressively in your 20s, go strong in your 30s, and moderate in your 40s.  
2. Check the Entry and the Exit Load: Though MFs don't have an entry or an exit load, if you sell your units within 7 days of buying them, MFs usually charge an exit load. 
3. Diversification: Check where your Mutual Fund's investment portfolio (ie where the MF has invested) and ensure that its investment is diversified across different companies and different industries.
4. Direct Mutual Fund Schemes over Regular Fund Schemes: Direct MFs and Regular Scheme MFs both invest in the same companies. But direct schemes give better returns as compared to Regular Fund Schemes since there is no middleman in the picture here. This reduces the cost for Direct schemes and the saved expense that is usually paid to a middleman generally goes to the investor.
5. Expense Ratios: An asset management company that takes care of investing your money incurs many expenses. A normal expense ratio ranges from about 0-1.5% and a higher ratio reflects that you will get a lower return.