The choice of a mutual fund can be compared to choice of your life partner. A wrong decision could wipe out your personal wealth. The thing which makes it difficult is the volatility of a mutual fund as some people opt for a direct mutual fund investment based on the rankings itself which is a wrong move. The worst aspect is that you would find large variations on the rankings aspect particularly based on the volatility aspect. For example a star performer in the present year could turn out to be a worst performer the next year. Let us now outline the steps which might make the choice of a mutual fund an easy one
Before we proceed ahead we need to understand our investment objective first and foremost. This could be short term or long term in nature. Depending on the objectives of your investment risk objective can be decided. Some experts may point out that debt free investments are risk free. On the other hand if your investment objective is long term then opt for equity based investments.
The system of rankings in terms of mutual funds is itself confusing. On one website you might find the rankings to the 3rd whereas on the other it can be 5th. Each one of the company does have their own way to rank funds. The best course of action would be to choose a couple of rankings that you trust the most and shortlist funds that are classified as sub class. Now check out what are the common points in between the rankings. Any system of ranking you choose should be one that you trust.
Before investing in any mutual fund check out the exit load of the scheme. The reason being you could need money before the investment horizon. Sometimes you end up making a mistake and invest in debt related schemes and that too without checking out the exit load. You might end up being on the rough side and for this reason it is better to check out the exit load before you invest. In the selection of schemes you could drop ones that have stringent load requirements which does not suit your needs. Make it a point that you retain the schemes with the minimum exit load requirement.
For the rankings of any mutual fund the performance of the last year is considered. But do watch out the performance of the last year. In this regard you need to check out the 3 or the 5 year performance of the scheme. This clearly points to the fact on which mutual fund is a fad and what a consistent performer is. Seldom might you come across funds that have performed well in the last year or so, but on careful analysis the performance in the last 3 or 5 years has been a major drop down. Make it a point that you keep away from such fads in your list.