How to Find the Best Mutual Funds to Buy

Stock markets are going up like anything, and everyone wants to have a piece of this pie. Retail investors normally get lured when they hear stories about sky rocketing returns. And they end up buying stocks without proper research or knowledge. Many a times, it leads to very less profits, or even losses.

Mutual funds come to the rescue of retail investors. Mutual funds are managed by fund managers, who are well qualified and have proper knowledge to trade in stock markets. They free retail investors from the burden of constantly tracking the market, and trying to decide which stocks to buy and when.

However, number of mutual funds available are increasing day by day. All the financial institutions seem to be launching mutual funds. And they come in all sort of flashy names. Trying to find the right mutual fund has also become as tough a decision as trying to find the best stock, thus defeating the whole purpose of investing in mutual funds. Thankfully, there are a few simple rules that can be followed to find the best mutual funds.

Equity Or Debt: The first step to start investing in mutual funds is to decide what kind of mutual funds do you want to invest in. If you are ready to take risk and want higher returns, then you may want to go with Equity mutual funds. However, in case you do not want to take risk and are fine with lower profits, then Debt mutual funds serve best for you.

Diversified Or Sectoral Funds: In case you decide to go with Equity mutual funds, there is a second choice to be made: whether you want to go with diversified funds or sectoral funds. Diversified funds are free to invest in any sector or stock they think are best, while sectoral funds are limited to just one or a few sectors. This takes the flexibility out of sectoral funds, but offer a chance for higher profits in case a particular sector outperforms the market. However, sectoral funds happen to be much more riskier, and personally, I am not a very big fan of them. Deciding upon diversified or sectoral funds would take you closer to your final fund.

Past Performance: This is one of the most important aspects while looking for best mutual funds, and somehow the one most ignored. Whenever you are trying to buy a fund, check its past performance. See how it has performed over a period of 1-year, 3-years, and 5-years. Then check this return with the performance of its peers in the same category. This will very clearly show which fund has been constantly performing better than its peers.

Allocation across sectors: This criteria is to really to decide how risky are your investments in a particular fund. Sometimes (bad)funds tend to concentrate their major chunk of investments in a particular sector. This makes the fund very risky, as under performance of just one sector would have a very bad impact on the fund. To avoid this, check the sectoral allocation of the funds. As a thumb rule, investments in a particular sector should not be greater than 30% of the fund's portfolio.

Allocation across stocks: This criteria also helps you in reducing the risk associated with a particular fund. Sometimes (bad) funds tend to be highly concentrated on one or a few stocks, and this would increase the risk profile of the fund. As a thumb rule, investment in any particular stock should not be greater than 5-6% of the entire portfolio of the fund.

Entry/Exit Loads: Almost all the funds have entry and exit loads. Thats basically the fee that you have to pay to fund while entering and exiting. Of course, good things do not come cheap. But its always better to check that your fund does not charges abnormally high entry/exit loads. This would directly reduce your returns.

Fund Management Expenses: This is the most hidden cost related to a fund. Each fund has some fund management expenses. Whenever choosing a fund, find its fund management expenses. The expenses should not be too high, and should be in line with its peers.

If you follow the above simple rules and research your funds using these rules, you are very likely to end up with good funds instead of ending up with funds that even drain your principal.

Happy Investing !!