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Steps to choose a right mutual fund scheme

Steps to choose a right mutual fund scheme

Step 1 (object oriented approach): If the investor is very clear about his/her goals and the end use of the appreciation, then macro-level selection of funds becomes easier. Unwarranted risk factors can be eliminated and the investor can choose a long or short tenure in a selective mode

Step 2 (basic economic assessment of the country): One must have a basic idea about the likely economic scenario in the next few years in terms of interest rates, inflation, industrial growth, education and above all GDP growth. This exercise helps the investor to choose the investment span better.

Step 3 (fund performance study): The investor is required to study the performance of the funds for at least the past five years, collecting data from at least two sources. Fund performance analysis from multiple sources eliminates ambiguity in fund ranking. Schemes having star rating this year may turn out to be the worst performers next year. Here, past performance should be evaluated scientifically to take the correct decision

Step 4 (AUM study): Any mutual fund scheme showing increasing AUM over the years always seems to be a reasonable choice because the statistics confirms the investor confidence level.

Step 5 (expense ratio): The funds factsheet released periodically by all fund houses, reveal the expense ratio. It is the cost that an AMC bears to manage the fund. A scheme with lower expense ratio promises better returns in the future. Funds with a higher ratio should be avoided. Oversized schemes are less costly in terms of the expense ratio because they operate with a large quantum of money.

Step 6: (Study of alpha): The excess return generated by a fund over the benchmark is a valuable study for choosing the right fund for investment. A higher alpha ( ) usually highlights the fund manager’s skill, ability and performance. This adds up to the investor confidence level.

Steps to choose a right mutual fund scheme

Due diligence report format as required by RBI

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