7 key aspects to look at before buying a mutual fund

Let’s say you are looking at buying mutual funds to start your investing journey.

But you don’t know where to start, what to look at and I wouldn’t blame you. There are over 2500 mutual funds in India.

Below are the 7 key aspects to look at before you end up buying the fund.

1) Direct v/s regular plan

Regular plans include commissions and are sold through intermediaries. They will also have a higher expense ratio as a matter of fact.

Direct plans are sold directly by the AMC and they don’t include commissions. ET money, groww, etc. are also platforms where you can buy direct plans.

Buy direct plans of funds to avoid paying extra expenses, thus increasing your net gain.

2) Expense ratio

Mutual funds incur various costs such as management fees, administrative costs, etc.

The expense ratio is the percentage of fees on your investment paid to the fund house.

As an example, say, you invest ₹ 1,00,000 a year into a scheme of a fund with a 2% expense ratio. At the end of the year, you will end up paying ₹ 2,000 in expenses.

This works the other way around as well, if your return on investment in 16%, after the fees you will end up with a net return of 14% (16%-2%).

Index funds will generally have the lowest expense ratios and international funds usually being more expensive in this aspect.

Remember less fees=more returns that you get to keep.

3) Tracking error

It is the difference between the fund’s returns v/s that of the benchmark like the Nifty50.

This is a very important metric when examining index funds, as the objective of the index fund is to stay as close to the index returns as possible. A low tracking error would mean that the fund is tracking the index well.

4) Category of fund

Before you buy a fund, make sure you understand the category it is in.

For equity funds, a broad classification would be – large-cap, mid-cap, small-cap, etc. Each category comes with its own risk as well as upside potential.

Adjust your expectations as per the category of the fund. For example, just because a large-cap fund is currently outperforming doesn’t mean that becomes the expectation of returns over the long term.

5) Portfolio of the fund

Make sure you take a look to see if the portfolio and the category of the fund are in line before you buy.

You can find the complete portfolio at https://www.moneycontrol.com or https://www.valueresearchonline.com.

Every fund manager has a different investment philosophy, do read the funds objective to learn more about the investing style.

A good practice would be to keep track of major portfolio changes after you start investing in the fund.

6) TAX treatment

Equity funds have capital gains tax when you sell them.

Short-term:- 15% + cess + surcharge .

Long-term:- Up to Rs 1 lakh a year is tax-exempt. Any gains above Rs 1 lakh are taxed at 10% + cess + surcharge.

7) Fund manager/management team

 It doesn’t hurt when your fund manager has a stellar track record.

PRO TIP:- Remember past performance doesn’t necessarily mean your fund will have the same in the future. As long as the fund is making good decisions, you should stay the course.

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