Basics to evaluate Mutual Fund Product before making an investment

Planning to invest in mutual funds but not sure about which fund to choose ? Keep all your worries aside, by the time you finish reading this post you will be pretty confident about your decisions. 

Let's go straight to the topic. Also be assured that for making basic evaluation of any fund you dont necessarily need to carry a heavy degree in Finance or Economics. Internet has made our lives extremely simple by putting everything at your desk. You run a search in the name of any mutual fund, Google would through you countless websites giving their analysis to you as per your need.

Mutual Fund has primarily two categories :-

1. Equity Linked Mutual Funds :- Such funds have their portfolios invested in Equity shares of various companies. As a result, NAV of these funds move in line with weighted average of prices of equity shares of those companies in which funds are invested.
2. Debt linked Mutual Funds :- Such funds have their portfolios invested in other than Equity shares, such as debentures or other instruments which assures a fixed return like Fixed Deposits.

The cut throat competition has yielded its benefits in Finance Sector as well. Today there are so many mutual fund products are available in the market that after one point of research one gets lost in the cloud of minor differences in offerings.

At this stage, you need to decide whether you want to sail with market fluctuations or need to sail smooth with fixed income from debt linked mutual funds.

Once you decide the category in which you wish to invest (Equity linked or Debt linked), the next step would be to decide on AMC (Asset Management Company) and fund. At this stage make use of Internet and search engines. For all kind of mutual fund related analysis I mostly refer to www.moneycontrol.com.

Things to consider while choosing product :-

1. Asset Base/Size :- See the asset size of AMC. Higher the better. Lower asset size has more risk of losses due to lesser diversification of funds deployment.
2. Risk Capacity :- Choose fund as per your risk capacity, it can be a fund with specific to only one sector or you can choose a diversified fund with lesser risk. There are options with allocation of funds in to  Debt and Equity.
3. Return History :- The most important part is to see Return history. Its good to see last three years return graph but past trend is clearly not the mirror for tomorrow. Study past trend along-with market history. Check out average Sensex and Nifty change, Check main competitor fund's growth and most importantly the growth of sectors in which your funds would finally be invested.
4. Dividend / Growth Fund :- Mutual funds gives an option to investor to either opt for Dividend funds or growth funds. In case of dividend funds AMCs announce dividend from time to time and based on the option exercised at the time of investment, announced dividend either will be paid or reinvested in same fund. The NAV of funds will take a downward correction in line with dividend announced. In case of Growth funds investor will not get any dividend and accordingly there will be no downward correction of NAV. Therefore one fund will have two different NAVs at any point of time, one for Dividend Fund and other for Growth fund. In normal scenario (except new funds) NAV of Growth funds will always be higher than Dividend fund. Choose dividend fund if in case you wish to have some income from dividend from time to time.
5. Investment Objective of Fund :- Offer Document (carries A to Z details of fund) has a clause of Investment objective of fund. Read through this and it will give you a flavor of top line strategy and direction of fund. If objective of fund is contrary to your objective of investment, look for other funds.
6. Fund Manager :- Mutual Fund performance largely depends on Fund Manager's performance.At the end of the day, all documents are lying in offices, its a fund manager who's skills will bring you good or bad return. You can read brief data about Fund Manager and other big guns of the fund in offer document. Its a good to have information, sometimes this clause can change your investment decision taken on previous five clauses.

Its your hard earned money, deploy it in such a manner that you are able to multiply your wealth faster. It deserves your wise and prudent decision before it is given in someone else's hands.

Have Happy Investing.