There are diverse sorts of investors one can find in the marketplace. Some are cautious while some are risk-taker. This particularly divides the universe of the investors into two distinct groups, (1) active investors and (2) passive investors. Passive investors tend to look for capital appreciation but not like the aggressive equity investors.
Whether it is active investors or passive investors – the security of money, they have invested, is very important to both of them. Snazzy equity market hardly appeals to all, because of its inherent high risk. On the other hand, investing in mutual funds can be a safe option to invest your hard earned money, that too with a satisfactory return. THERE ARE MUTUAL FUNDS THAT HAVE GIVEN OVER 20% ANNUALIZED RETURN IN THE LAST 10 YEARS – SIMPLY DOUBLE YOUR MONEY IN 5 YEARS! IMPRESSIVE – RIGHT!
After reading this you probably start thinking how to find mutual fund schemes that can double your money much faster than other available alternatives. Let me tell you that (1) Past performance, (2) volatility measure, (3) expense ratio, (4) track record of the portfolio manager, and (5) risk-adjusted return, etc. are but some of the primary things to consider before selecting a mutual fund. Let’s check then one by one in order to help you select a top performing mutual fund scheme.
- The Pedigree Of The Fund House – Subscribe to a mutual fund scheme launched by the fund houses that have a sustainable business model and a strong presence in the market. The reason behind doing is that their investment decision, risk measure, building portfolio, and operational efficiency significantly influence the long run growth prospect of a mutual fund scheme.
- Risk-Return Trade-Off – Every investment has some degree of inherent risk. A scheme is not an exception either; ideally, the return should justify the risk taken. A good investment option is the one that has a higher yield than other investment options with the same risk profile. Risk-adjusted return is the best measure of judging the performance. One may use Sharpe ratio to find out an extra return that a scheme generates for each unit of risk taken. The return of a fund is generally compared against the risk-free return e.g. returns from bank term deposit, government bonds, etc.
- Diversification – Well-diversified mutual fund portfolio schemes have a lower risk and thus they manage to produce a steady return over the long haul. Diversification is generally done on the basis of (1) asset class, (2) the risk profile of asset, (3) types of stocks, (4) geographies, etc. Before investing in any particular scheme, one must cross check the portfolio history of a scheme.
- Expense Ratio – Expense ratio refers to the annual expenses incurred by the mutual fund scheme as a percentage of its total asset holding. In the long haul, the schemes having a lower expense ratio are more likely to grow and outperform others with a higher expense ratio. Schemes with low expense ratio have more funds to invest in assets. By and large, the expense ratio of various schemes ranges from 2% to 2.25%.
Before picking top-performing mutual funds, one should gather all sorts of data and information about these four vital parameters to analyze the performance, and then choose the best fund to invest.