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How To Choose Mutual Funds For Beginners?

Mr. C.S. Sudheer | Updated On Monday, November 07,2016, 06:19 PM
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How To Choose Mutual Funds For Beginners?

"Mutual funds give people the sense that they're investing with the big boys and that they're really not at a disadvantage entering the stock market."

Times are bad. Interest rates offered by banks on fixed deposits, are quite low these days. Why….even your beloved PPF, is cutting down interest rates. PPF has fixed interest rates at 8%, for the quarter, October to December 2016. Then they are the rumors…PPF interest rates, could even fall below 8%, a level last seen in 1979.Fortunately inflation is low. But for how long? Inflation can rise at any time. This is the time you better consider an investment in mutual funds. Mutual funds are known to give returns above inflation, over the long term. But there’s a problem….You are a beginner, who doesn’t know head or tail of mutual funds.

Everyone is a beginner, till he begins. You got to start somewhere. So why not read up, how beginners can choose mutual funds. Need help with this? Why don’t you contact, India’s Largest Financial Education Company, which educates over 14000 people every day. Just leave a missed call on IndianMoney.com financial education helpline 02261816111 or just post a request on IndianMoney.com website. 

Learn how a mutual fund works

The concept of mutual funds is very simple. Mutual funds collect and pool money, from you and other investors. This money is invested, depending on the type of mutual fund, you choose. If you choose equity, your money is invested in reputed stocks. If you choose debt, your money is invested in fixed income securities, like bonds and money market instruments. You can also choose hybrid funds. Your money is invested in a mix of both, equity and debt.

Mutual funds: Only as good as their investment

You invest money in an equity diversified mutual fund. Your money is invested in reputed stocks. If the stock markets do well…..equity diversified mutual funds do well. Your money grows and you get good returns. If stock markets crash, most equity diversified mutual funds, perform badly.

The fate of your equity diversified mutual fund, depends on the stock market. Realizing this is the first step in choosing a good mutual fund.

You invest in a gold ETF, which is a type of mutual fund. This mutual fund invests your money in gold. If the gold prices are high, the gold ETF does well. If the gold price crashes, expect a bad performance from your gold ETF.

Selecting best mutual funds and mutual fund schemes

There are so many mutual fund houses. Each mutual fund house, offers so many different mutual fund schemes. Your dilemma…Which mutual fund house and mutual fund scheme to choose?  This is not a problem, only unique to first time investors, in mutual funds. Even experienced investors find choosing a good mutual fund scheme, a difficult task. Magazines, TV shows and even the internet, flood you with facts and figures on the performance of mutual funds. The first thing you do:

  • Choose a reputed mutual fund house. The next thing….Your mutual fund needs to be managed by a highly skilled and reputed fund manager, backed by an excellent team.

Choose a mutual fund only looking at the star rating?

You’re a first time investor in mutual funds. Should you choose a mutual fund, just by looking at the star rating? Many reputed finance publications and research companies, rate mutual fund houses and also mutual fund schemes. Different methods are used by different research companies, to rate mutual funds. These mutual fund houses and mutual fund schemes, are given a star rating.

This may be:

5 star rating, 4 star rating, 3 star rating, 2 star rating and even 1 star rating.

 

How do mutual funds get a star rating?

 

Mutual fund ratings depend mainly on returns. This is…past returns also called historical returns. Any change in returns means, re-rating of the mutual fund. Rating also depends on reputation of the fund manager.

The mutual fund which has a 5 star rating is better than a mutual fund which has a 1 star rating.

The rating of your mutual fund is slipping….Should you get worried? Your mutual fund rating has slipped, from 5 star rating to 4 star rating. Don’t bother. If the rating slips to 3 star rating, get ready. If the rating goes to 2 star rating, don’t think….jump. If the rating goes to 1 star, you are stuck in the wrong fund.

Yes….you have the confidence to choose the right mutual fund. Why not invest in a mutual fund scheme, through a systematic investment plan, called SIP? This is just a method of investing in a mutual fund. You invest a pre-determined amount in the mutual fund, at regular intervals of time. This is an excellent and disciplined way, to invest in mutual funds. So invest with confidence. Be Wise. Get Rich.

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Article Author

Mr. C.S. Sudheer

Mr C.S.Sudheer is a management graduate. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.

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