15 Mutual Fund Investment Checklist India

Introduction

A mutual fund is a professionally managed investment vehicle that pools multiple investors’ money to invest in securities such as stocks, bonds, and money market instruments. Investors purchase units of the mutual fund, representing a portion of the holdings in the fund’s portfolio. Mutual funds are managed by asset management companies (AMCs), which charge a fee for their services.

Investing in mutual funds can be an excellent way for individuals to participate in the stock market without picking individual stocks. Mutual funds offer the diversification, which means spreading the investment across multiple securities to reduce the risk of losses. Moreover, mutual funds are managed by professional fund managers with the expertise to research and select securities, which can result in better returns. Additionally, mutual funds offer liquidity, meaning investors can easily buy and sell units based on their investment needs.

The purpose of this article is to provide a comprehensive guide to the basic parameters to consider before investing in mutual funds. We will explore the various factors that can impact the performance of mutual funds, such as ratings, NAV, expense ratio, entry load, exit load, AMC, AUM, benchmark, fund manager, holdings, launch date, lock-in period, returns, risk, and SIP minimum. By the end of this article, readers will have a clear understanding of how to evaluate mutual funds and make informed investment decisions.

mutual fund investment checklist india

1. Rating

In March 2021, Franklin Templeton Mutual Fund’s decision to wind up six debt schemes shocked the Indian mutual fund industry and raised questions about the effectiveness of mutual fund ratings. The schemes had received high ratings from rating agencies, but their underlying securities were later found to be risky and illiquid, leading to the suspension of redemptions.

Mutual fund rating is a system that helps investors assess the quality and potential of a mutual fund. Ratings are assigned by rating agencies based on various factors such as past performance, expense ratios, asset allocation, and risk management. Ratings are expressed in terms of stars, with five stars being the highest and one star being the lowest.

1.1 Importance of Rating in Mutual Fund Selection

Ratings are essential for investors to evaluate mutual funds and make informed investment decisions. A high rating indicates that the fund has a good track record of performance and a strong portfolio, which can lead to better returns for investors. Moreover, ratings can help investors identify mutual funds that align with their investment goals and risk appetite.

1.2 Top Rating Agencies

In India, three leading rating agencies provide mutual fund ratings - CRISIL, Morningstar, and Value Research. CRISIL is a subsidiary of S&P Global, while Morningstar and Value Research are independent agencies. These agencies evaluate mutual funds based on various parameters such as performance, risk, and fees and assign a rating accordingly.

According to a report by CRISIL, as of December 2021, the highest number of five-star rated funds were in the equity large-cap and equity multi-cap categories. On the other hand, the debt category had the lowest number of five-star-rated funds. It is important to note that ratings do not guarantee future performance, and investors should also consider other factors before making investment decisions.

2. NAV

As of January 2022, the average mutual fund NAV in India was around Rs. 41. Mutual funds with a higher NAV include those in the large-cap equity and debt categories, while those in the small-cap equity and mid-cap equity categories have a lower NAV. The highest NAV recorded in India’s mutual fund industry was in excess of Rs. 20,000 by a closed-end fund in 1994, while some liquid funds recorded the lowest NAV during the COVID-19 pandemic in March 2020.

2.1 Definition of NAV

NAV stands for Net Asset Value, the per-unit value of a mutual fund scheme. It is calculated by dividing the total value of the mutual fund’s assets by the number of outstanding units. In other words, NAV is the price at which investors can buy or sell mutual fund units.

2.2 Importance of NAV in Mutual Fund Investment

NAV plays a crucial role in mutual fund investment, as it reflects the fund’s performance and the value of an investor’s investment. A higher NAV indicates that the fund has performed well and its assets have appreciated, leading to higher investor returns. On the other hand, a lower NAV indicates poor performance and lower returns.

Investors should note that the NAV is not the only factor to consider while making investment decisions. They should also consider the fund’s investment objectives, risk profile, and past performance, among other factors.

2.3 Calculation of NAV

NAV is calculated daily and is based on the market value of the mutual fund’s underlying assets. The total value of the mutual fund’s assets, including stocks, bonds, and other securities, is divided by the number of outstanding units to calculate the NAV. The NAV is then rounded off to the nearest paisa.

3. Expense Ratio

This section will discuss the definition, importance, and calculation of expense ratios in mutual funds, with a specific focus on the Indian market.

3.1 Definition of Expense Ratio

The expense ratio is a percentage of the total assets managed by a mutual fund that is charged as fees by the fund manager. These fees cover managing the fund, including administrative expenses, marketing expenses, and compensation for the fund manager. The expense ratio is deducted from the fund’s returns, which means the higher the expense ratio, the lower the returns for the investors.

3.2 Importance of Expense Ratio in mutual fund selection

The expense ratio is among the most critical factors when selecting a mutual fund. A high expense ratio can significantly erode the returns on investment, impacting the portfolio’s long-term growth. In contrast, a low expense ratio can boost returns and help investors earn higher profits.

For instance, let’s consider two mutual funds with similar investment objectives and returns. Fund A has an expense ratio of 1%, while Fund B has an expense ratio of 0.5%. Over ten years, the difference in returns between the two funds can be substantial, with Fund B providing higher returns due to its lower expense ratio.

3.3 Calculation of Expense Ratio

The expense ratio of a mutual fund can be calculated by dividing the total expenses incurred by the fund by its average net assets. The resulting figure is expressed as a percentage and represents the expense ratio for the fund.

It is important to note that while the expense ratio is a crucial factor in mutual fund selection, investors should not base their decisions solely on this parameter. Other factors, such as the fund’s investment objective, past performance, and fund manager’s track record, should also be considered before investing in a mutual fund.

4. Entry Load

This section will discuss the definition, importance, and calculation of entry loads in mutual funds.

4.1 Definition of Entry Load

The entry load is a fee mutual funds charge to investors at the time of investment. The entry load is a percentage of the amount invested and is deducted from the investor’s principal amount. The purpose of the entry load is to compensate the distributor or broker who sells the mutual fund to the investor. The entry load has been a topic of debate in the Indian mutual fund industry, with regulators taking several measures to regulate and control its impact on investor returns.

4.2 Importance of Entry Load in mutual fund investment

The entry load can significantly impact the returns that an investor can expect from a mutual fund. A high entry load can reduce the amount of money the investor is investing in the mutual fund, which, in turn, can result in lower returns. In contrast, a low or no entry load can ensure that a higher amount of money is invested in the mutual fund, leading to higher returns.

For example, suppose an investor invests INR 1,00,000 in a mutual fund with a 2% entry load. In that case, the actual amount invested in the fund will be INR 98,000, with INR 2,000 deducted as an entry load. If the mutual fund generates a return of 10%, the investor will receive a return of INR 9,800, which is lower than what they would have earned if there was no entry load.

4.3 Calculation of Entry Load

The entry load for a mutual fund is calculated as a percentage of the amount invested by the investor. However, it is essential to note that the Securities and Exchange Board of India (SEBI) has abolished entry loads on mutual fund investments since August 2009. Instead, mutual funds charge an expense ratio, a fee charged to investors to cover the costs of managing the fund. The expense ratio is deducted from the fund’s returns and is a critical parameter to consider while investing in mutual funds.

5. Exit Load

This section will discuss the definition, importance, and calculation of exit loads in mutual funds.

5.1 Definition of Exit Load

The exit load is a fee mutual funds charge when investors redeem their investments before a specific period. The exit load is typically a percentage of the amount redeemed and can vary depending on the mutual fund’s rules. The exit load is designed to discourage investors from withdrawing their investments too soon, as it can impact the fund’s overall performance. The exit load is essential to consider while investing in mutual funds, as it can significantly impact the investor’s returns.

5.2 Importance of Exit Load in mutual fund investment

The exit load is essential to consider while investing in mutual funds. A high exit load can significantly impact the returns that an investor can expect from a mutual fund. The exit load can be a deterrent for investors looking to redeem their investments early, as it can reduce their overall returns. In contrast, a low or no exit load can ensure that investors can redeem their investments with minimal impact on their overall returns.

For example, suppose an investor invests INR 1,00,000 in a mutual fund with an exit load of 1% if redeemed within six months. If the investor redeems their investment after four months, they will have to pay an exit load of INR 1,000, reducing their overall returns. However, if the mutual fund had a lower or no exit load, the investor could have redeemed their investment without incurring additional charges.

5.3 Calculation of Exit Load

The exit load for a mutual fund is typically calculated as a percentage of the amount redeemed by the investor. The exit load can vary depending on the mutual fund’s rules and differ for different investment periods. For example, a mutual fund may charge a 1% exit load if redeemed within six months, a 0.5% exit load if redeemed within one year, and no exit load after one year.

It is important to note that the Securities and Exchange Board of India (SEBI) has set a maximum limit on the exit load that mutual funds can charge. The maximum exit load that mutual funds can charge is 1%, which can only be charged if the investor redeems their investment within one year of the investment date. Mutual funds cannot charge an exit load if the investor redeems their investment after one year.

6. AMC

When investing in mutual funds, one crucial factor is the Asset Management Company (AMC) that manages the fund. The AMC plays a critical role in managing the fund, making investment decisions, and ensuring that the fund’s objectives are aligned with those of the investors. This article will discuss the definition, importance, and top AMCs in India.

6.1 Definition of AMC

An Asset Management Company (AMC) is a financial institution that manages mutual funds and other investment vehicles. The AMC is responsible for investing the investors’ money in different asset classes, such as stocks, bonds, and commodities, by the fund’s objectives. The AMC charges a fee for its services, typically a percentage of the assets under management (AUM). The AMC is responsible for managing the fund’s portfolio, conducting research, and ensuring that the fund’s performance aligns with the investors’ expectations.

6.2 Importance of AMC in mutual fund selection

The AMC plays a crucial role in mutual fund selection, as it manages the fund’s investments and ensures its objectives are met. A good AMC can significantly affect a fund’s performance, while a poor AMC can lead to underperformance and suboptimal returns for the investor. Therefore, selecting an AMC with a proven track record of managing funds successfully and delivering consistent returns over the long term is essential.

When selecting a mutual fund, investors must consider AMC’s reputation, philosophy, and style. A good AMC should have a transparent and robust investment process, a disciplined approach to risk management, and a strong research team. Investors must evaluate AMC’s investment strategy and ensure it aligns with their investment goals and risk appetite.

6.3 Top AMCs in India

India has a vibrant mutual fund industry, with several AMCs managing diverse funds. Some of the top AMCs in India include HDFC Asset Management Company, ICICI Prudential Asset Management Company, Aditya Birla Sun Life Asset Management Company, SBI Funds Management Private Limited, and Reliance Nippon Life Asset Management Limited.

These AMCs have a proven track record of managing funds successfully and delivering consistent returns to investors. They have many funds, including equity, debt, and hybrid funds, catering to investors’ different risk profiles and investment goals.

7. AUM

Assets Under Management (AUM) is an essential metric for investors before investing in mutual funds. The AUM is the total value of assets managed by the mutual fund company on behalf of its investors. It includes all the assets the mutual fund holds, such as stocks, bonds, and other securities. The AUM of a mutual fund is a crucial indicator of its size, popularity, and performance.

7.1 Definition of AUM

AUM or Assets Under Management is the total market value of assets a mutual fund company manages on behalf of its investors. It includes all the assets the mutual fund holds, such as stocks, bonds, and other securities. It is an essential metric that reflects a mutual fund’s size, popularity, and performance.

7.2 Importance of AUM in mutual fund selection

AUM is an essential factor to consider when selecting a mutual fund. A higher AUM indicates that the fund is popular among investors and has a larger pool of resources to invest in. However, investors should not rely solely on AUM to measure a mutual fund’s potential. They should also consider other factors such as performance, expense ratio, and fund management experience to make an informed decision.

7.3 Significance of AUM for investors

The AUM of a mutual fund is significant for investors as it reflects the fund’s popularity and success. A larger AUM indicates that the mutual fund has attracted many investors and, therefore, there is more liquidity in the fund. This means the mutual fund is better equipped to handle sudden redemptions and less likely to experience a liquidity crunch. On the other hand, a smaller AUM can mean that the mutual fund is less well-known and popular among investors, which may lead to lower liquidity and higher volatility.

8. Benchmark

As an investor, it is essential to know the performance of a mutual fund. But how do we determine the performance of a mutual fund? That’s where benchmarks come into the picture. A benchmark is an index that represents a particular segment of the market. It helps to measure the performance of a mutual fund by comparing its returns to the benchmark. This section will discuss the significance of benchmarks in mutual fund selection and the standard benchmarks used in the industry.

8.1 Definition of Benchmark

A benchmark is a standard against which the performance of a mutual fund can be measured. It is a specific index or a group representing the market’s performance or a particular sector. Mutual funds use benchmarks to assess their investment performance against the market or sector they are invested.

8.2 Importance of Benchmark in Mutual Fund Selection

Selecting a benchmark is crucial in mutual fund selection. A benchmark helps investors compare a mutual fund’s performance with the market or a specific sector. It helps assess the fund’s performance against its peers and determine whether it has outperformed or underperformed in the market. Investors should select a benchmark that matches the fund’s investment objective and risk profile.

8.3 Common Benchmarks for Mutual Funds

The benchmark a mutual fund selects depends on its investment objective and the type of securities it invests in. Some standard benchmarks used in India are BSE Sensex, NIFTY 50, NIFTY Bank, NIFTY Midcap 100, and NIFTY Smallcap 100. The benchmarks can be broadly classified into equity, debt, and hybrid. Equity benchmarks are used for equity-oriented funds, debt benchmarks for debt-oriented funds, and hybrid benchmarks for balanced funds.

9. Fund Manager

A mutual fund is managed by a professional Fund Manager responsible for making investment decisions and managing the portfolio to achieve the fund’s objectives. The Fund Manager’s role is crucial in determining the fund’s performance as their investment decisions impact the returns the investors earn.

9.1 Definition of Fund Manager

A Fund Manager is a professional who manages a mutual fund’s investment portfolio and makes investment decisions on behalf of the investors. The Fund Manager’s job is to analyze the market conditions, identify investment opportunities, and manage the fund’s portfolio to achieve the fund’s objectives.

9.2 Importance of Fund Manager in mutual fund investment

The Fund Manager’s role is critical in mutual fund investment as their investment decisions impact the returns earned by the investors. A skilled Fund Manager can create alpha for the investors by identifying undervalued stocks or investing in high-growth sectors. Therefore, evaluating the Fund Manager’s track record and experience is essential before investing in a mutual fund.

9.3 Key factors to consider while evaluating a Fund Manager

While evaluating a Fund Manager, investors should consider their experience, past performance, investment philosophy, and their team’s expertise. Investors should also evaluate the Fund Manager’s investment style, risk management approach, and track record in managing the fund’s portfolio. Additionally, investors should consider the Fund Manager’s tenure with the fund house and their stability in the role. A long and consistent tenure is generally considered positive for the fund’s performance.

10. Holdings

Mutual funds are popular investment instruments that pool money from multiple investors to invest in a diversified portfolio of assets. One of the key aspects to consider while selecting a mutual fund is its holdings. In this section, we will explore the definition of holdings, the importance of holdings in mutual fund investment, and the role of holdings in determining mutual fund performance.

10.1 Definition of Holdings

Holdings refer to the securities, stocks, bonds, or other financial instruments a mutual fund invests in. A mutual fund’s holdings can be individual stocks or bonds, exchange-traded funds (ETFs), or other mutual funds. A mutual fund’s holdings can be found in the fund’s fact sheet or prospectus.

10.2 Importance of Holdings in mutual fund investment

A mutual fund’s holdings play a crucial role in determining its performance. The quality of holdings, their diversification, and the allocation of assets across different sectors, industries, and geographies can impact the risk and return characteristics of the mutual fund. A well-diversified mutual fund with a mix of high-quality holdings can offer investors a stable return and lower risk.

10.3 Role of Holdings in determining mutual fund performance

The performance of a mutual fund is closely linked to its holdings’ performance. The holdings determine the fund’s asset allocation and investment strategy, which can impact the fund’s returns. The weightage of each holding in the portfolio and the fund’s overall asset allocation can impact the mutual fund’s risk and return profile. For instance, if a mutual fund has a significant allocation to a particular sector or stock that performs poorly, the fund’s overall returns can be impacted.

11. Launch Date

The launch date is an important parameter that investors must consider while selecting mutual funds. It refers to when the mutual fund was introduced to the market for investors to buy. The launch date is significant as it can provide insights into the fund’s maturity, stability, and investment philosophy. This section will discuss the definition of the launch date, its importance in mutual fund selection, and the relationship between the launch date and mutual fund performance.

11.1 Definition of Launch Date

The launch date is when a mutual fund was introduced to the market. It is when investors can start buying units of the mutual fund. The launch date is significant as it indicates the fund’s inception and provides information about its age, investment objectives, and the fund manager’s strategy. The launch date is also essential for calculating the fund’s returns and tracking its performance over time.

11.2 Importance of Launch Date in Mutual Fund Selection

The launch date is crucial in mutual fund selection as it helps investors gauge its maturity and stability. Generally, older mutual funds have a more extended track record, which allows investors to analyze the fund’s performance over various market cycles. Launch date can also provide insights into the fund manager’s strategy, investment philosophy, and ability to manage the fund effectively. Investors can evaluate the fund manager’s past performance by comparing the fund’s returns with the benchmark index and other funds in the same category.

11.3 Relationship between Launch Date and Mutual Fund Performance

The relationship between the launch date and mutual fund performance can be complex. Some investors believe older funds are more stable and have a longer track record, making them a safer investment option. However, it is only sometimes the case that older funds outperform younger funds. The fund manager’s skill, philosophy, and objective determine the fund’s performance.

The launch date can also impact the fund’s expense ratio, as older funds may have higher expenses due to higher management fees. However, it is essential to note that the expense ratio is just one parameter and should not be the sole factor for mutual fund selection.

12. Lock-in Period

As a mutual fund investor, one of the critical aspects to consider before investing is the lock-in period. The lock-in period refers to the minimum duration for which an investor must stay invested in the fund before they can redeem their units. In India, lock-in periods vary depending on the type of mutual fund scheme.

The importance of the lock-in period in mutual fund investment lies in its ability to encourage long-term investment and prevent frequent churning of portfolios. Requiring investors to stay invested for a certain period helps align their investment horizon with the fund’s investment objective. This benefits the investor by giving them adequate time to reap the benefits of compounding and the fund manager effectively managing the fund’s portfolio.

The lock-in period is particularly significant in the Equity Linked Saving Scheme (ELSS), a tax-saving mutual fund. As per the regulations, ELSS funds have a lock-in period of 3 years, which means that investors cannot redeem their units before the completion of 3 years. However, this lock-in period makes ELSS eligible for tax benefits under Section 80C of the Income Tax Act, 1961. By investing in ELSS, investors can claim a deduction of up to Rs. 1.5 lakhs from their taxable income. Investors must remember the lock-in period and its implications while investing in ELSS.

13. Returns

As investor, the ultimate objective of investing in mutual funds is to generate returns. Returns are the profits earned by investors from their investments in mutual funds. The returns from mutual funds can vary depending on the performance of the underlying assets the mutual fund invests in. Understanding returns is an essential aspect of mutual fund investment.

Returns are usually expressed as a percentage and can be calculated on various timelines like one year, three years, or five years. Evaluating returns while selecting mutual funds for investment is essential as it helps investors compare different funds’ performance.

The importance of returns in mutual fund investment lies in the fact that it directly affects the amount of wealth the investor generates. Therefore, it is crucial to consider historical returns when selecting mutual funds.

Checking 1Y, 3Y, and 5Y returns effectively evaluates the historical performance of mutual funds. By analyzing returns over different timelines, investors can understand the consistency of the fund’s performance and its ability to generate returns in favorable and unfavorable market conditions. However, it is essential to remember that past performance does not guarantee future returns. Therefore, investors should not solely rely on historical returns but also consider other factors like risk, fund manager, investment philosophy, etc., before making investment decisions.

14. Risk

As an investor, understanding the concept of risk is paramount in making informed investment decisions. Risk, in simple terms, refers to the potential of losing money due to an unfavorable market movement. Mutual funds are not immune to risk, and market volatility, interest rates, and economic events influence their performance.

When it comes to mutual fund investment, investors need to be aware of the different types of risks associated with it. These include market risk, interest rate risk, credit risk, liquidity risk, and inflation risk. The level of risk associated with a mutual fund is typically determined by its investment objective, asset allocation, and portfolio composition.

It’s essential to evaluate mutual fund risk based on asset allocation. Asset allocation refers to how the mutual fund’s portfolio is divided among asset classes such as equity, debt, and cash. A well-diversified portfolio can help reduce overall portfolio risk. Investors should consider their investment goals, risk appetite, and time horizon before choosing a mutual fund with an appropriate asset allocation.

Furthermore, investors can use various tools to assess the risk associated with mutual funds, such as standard deviation, Sharpe ratio, and alpha. These tools can help investors evaluate the risk-adjusted returns of a mutual fund.

In conclusion, understanding the concept of risk and evaluating the risk associated with mutual funds is crucial for making informed investment decisions. Investors should evaluate the level of risk associated with a mutual fund based on its investment objective, asset allocation, and portfolio composition. Before choosing a mutual fund, they should also consider their investment goals, risk appetite, and time horizon. Using various risk assessment tools can further aid in making informed investment decisions.

15. Minimum SIP

Systematic Investment Plan (SIP) is an investment strategy that allows investors to invest a fixed amount of money at regular intervals in a mutual fund. SIP Minimum refers to the minimum investment amount required to start a SIP investment in a mutual fund.

15.1 Importance of SIP Minimum in mutual fund investment

SIPs have become popular in India due to their convenience, affordability, and potential for generating high returns. The minimum investment amount required to start a SIP varies depending on the mutual fund and can range from as low as Rs. 100 to as high as Rs. 10,000. Choosing a mutual fund with an affordable SIP minimum that fits within the investor’s budget is crucial. This ensures that the investor can invest regularly and take advantage of the power of compounding.

15.2 Determining the minimum investment amount for SIP

When selecting a mutual fund for SIP investment, investors should consider the minimum investment amount required and their financial goals and objectives. The minimum investment amount should be within the investor’s budget and allow regular investments without impacting their overall financial plan.

Many mutual funds in India offer SIP calculators to help investors determine the minimum investment amount required to achieve their financial goals. These calculators consider factors such as investment horizon, expected rate of return, and investment amount to determine the SIP amount required to reach the desired financial goal.

Investors can also use online investment platforms to compare mutual funds and their SIP minimums. These platforms provide detailed information on each mutual fund’s SIP minimum, investment objective, performance history, and other relevant metrics to help investors make an informed investment decision.

Conclusion

Mutual funds offer a convenient and cost-effective way for investors to participate in the stock market. However, selecting the right mutual fund can be a daunting task. Understanding the 17 basic parameters discussed in this series of articles can be beneficial.

To summarize, an investor should evaluate the following parameters before investing in mutual funds investment objective, fund size, expense ratio, asset allocation, investment style, diversification, exit load, SIP frequency, benchmark, fund manager, holdings, launch date, lock-in period, returns, risk, and SIP minimum.

While these parameters are essential, some may be more critical than others, depending on the investor’s preferences and financial goals. For example, a long-term investor may emphasize the fund manager’s performance history more, while a short-term investor may focus on the fund’s exit load.

In conclusion, mutual fund investments can be an excellent tool for achieving long-term financial goals. But it is essential to conduct thorough research and due diligence before investing in any mutual fund. With a proper understanding of these basic parameters, investors can confidently make informed decisions and achieve their financial objectives.

Recent Articles :

The Ultimate Guide to Portfolio Rebalancing for Mutual Fund Investments
Taxation of Mutual Funds A Complete Guide for Investors in India
Comprehensive Guide to Mutual Fund Risk Management in India
Ultimate Guide to Investing in Mutual Funds through SIPs in India
Balanced Funds in the Indian Market, Advantages and Disadvantages