Mutual Funds – How do I select the one to invest in?

Mutual Funds are one of the best options you can invest your money in. But with thousands of them available in the market right now, how do you select one? Let’s explore this topic today so you can make sound financial decisions and start your investment journey ASAP!

It is very important to note here that –

1. I will be sharing screenshots of certain funds. They are only examples and should not be considered my recommendation of those funds.
2. I am a long-term investor guy and that reflects in my strategy of buying Mutual Funds too. If you are looking for short-term, quick money-making advice, this blog might not help you.
3. This is not a sponsored post and I have no affiliations with any of the products I have demonstrated here. I have been using them for a while and these are the ones I prefer.

Welcome to my series of – ‘In Pursuit of Financial Freedom‘. In this series, I am sharing my personal experiences (failures and success) in money matters. I am not a financial advisor so I cannot give you stock tips or fund recommendations. But, I can provide you the information I have so the decisions become easier for you. If you have not already, do take some time to read through my first 3 blog posts in this series to understand the basics and then come back to this one.

01. Why is investing your money necessary?
02. The basics – do this before investing your money.
03. Different investment options for you in India.

Alright, now let’s jump into selecting a mutual fund and follow the steps I usually go through before narrowing one down –

1. The Tools

Before we jump into buying a Mutual Fund, I will be using the following apps/web apps for either researching it or buying it. Obviously, these are not the only ones out there but they are my preference. Primarily, I will use the following three tools (you can download their mobile apps too but I will use the website screenshots as reference) –

1. Coin by Zerodha – This is where I buy all my Mutual Funds. It is super easy and quite seamless. You will need a Zerodha Demat account to buy/redeem Mutual Funds from here. If you don’t have an account yet, use this link to create one.
2. Money Control – We will use this to research Mutual Funds before we buy them on the Coin app.
3. Value Research Online – Similar to Money Control, we will use this for research and additional details about the Mutual Funds. Because getting a second opinion is always a good idea.

2. Identify a Goal

In my previous post, I explained the importance of identifying goals and making your investments against those goals. It is essential to have an end goal in mind so you know when to stop or how to adjust your investments. A good financial goal has 3 parts to it – The what, The how much, and the when. For example – Child education worth 50 lakhs in 15 years or retirement fund worth 10 crores in 25 years. When you know this, you can use a SIP calculator to figure out how much you need to invest to achieve that goal (I am going to demonstrate the SIP method which I feel is the best way to invest).

For the purposes of this blog, let’s consider your goal is to save 50 lakh rupees for child education in 15 years. Using the SIP calculator, you can see that if you invest 10,000 Rs per month for 15 years at an expected return rate of 12%, then you will have 50.5 lakhs where your invested money is 18 lakhs and the rest 32.5 lakhs is the returns earned. To make things simpler, let’s not account for inflation at the moment.

Ok, now that we have a goal defined, lets find a Mutual fund that will help us achieve that.

3. Identify the category of fund for your goal

We discussed in a previous post that the main types of Mutual Funds are Equity-based Funds, Debt Funds, and Hybrid Funds.

First, you need to identify the type of Mutual fund you want to invest in. This should depend on the goal, time horizon, and risk tolerance. Let’s take our goal of child education. Our time horizon is 15 years which is fairly long-term. And my risk tolerance is on the low/medium side because I am looking for safe returns for this particular goal. In this case, Equity-based funds would serve best. If your goal is short-term and low risk, look for debt funds.

Equity funds, again, are of different types – Large-cap, mid-cap, small-cap, multi-cap, etc. For my goal, Large-cap or Multi cap would fit the best because I am looking for safer returns but I also want to play it safe. If I wanted high returns in a short term, I would go with mid-cap or small-cap funds (it is also high risk).

The following table is not very comprehensive but more ore like guidance when you select the category of a fund –

	Long Term (5+ years)	Medium Term (3-5 years)
High Risk	Mid-Cap, Small Cap	Multi-cap, Mid Cap
Medium Risk	Multi-Cap, Mid Cap	Debt Funds
Low Risk	Large Cap	Debt Funds

4. Find 2-3 best funds in the category

Ok, now that we have identified that for my goal equity-based large-cap fund seems like the right fit, we need to find 2-3 best funds in that category and compare them against each other. I can put it down to three easy steps.

i. Go to Money Control portal > Mutual Funds. It gives you a list of top-performing in different categories. As of writing this post, these are the high-rated ones in that category on Money Control.

ii. Go to Value Research Online Portal > Funds > Large Cap (or your category) > Sort by rating. As of writing this post, these are the high-rated ones in this category on that portal.

iii. Find the common funds between the two portals. If you compare the 2 images above you can see that both the portals have highly rated Canara Robeco Bluechip Equity and Edelweiss Large Cap. These 2 are the common funds. We have found our 2 contenders to choose from!

5. Finding the best Mutual Fund for you

So far, we have found 2 contenders in our quest to find the right Mutual Fund for our goal. Now, we need to narrow it down to one so we can invest in. I usually look for these parameters to find the one –

i. Expense Ratio

The expense ratio is basically the fees you pay to the fund management company for managing your money. Naturally, the higher the expense ratio, the less money you get back. Typically, the expense ratio is between 0.5 – 2.5%. Say the expense ratio is 2% and you are earning a return of 12% on the fund. So, essentially you will earn a return of 10% because the 2% will be taken as fees by the fund management company.

You will see 2 plans of the same fund with 2 different expense ratios – one is a direct plan and the other is a regular plan. A regular plan is the one where there is a middle man like a financial advisor who also charges their fees. A direct plan is one you directly buy through apps like Coin by Zerodha, Upstox, etc. In this case, there is no middle man. Naturally, the direct plan has a lower expense ratio than the regular plans.

Since you are here, I am assuming you plan to invest directly and not through a financial advisor. So, let’s look at the direct expense ratio for the 2 funds we selected as examples –

Edelweiss Large Cap – 1.04%
Canara Robeco Bluechip Equity – 0.45%

In this case, Canara Robeco looks like the winner between the two.

ii. Looking at Fund Managers

The performance of a fund is very dependent on the manager. And since you are handing over your money to the manager, it is important that you check their past performance and how long have they been managing that particular fund. Usually, when I see high returns of a fund but if the fund manager has recently changed, then the past performance doesn’t matter. Because the returns were given by a different manager.

So, lets look at our example funds and their fund managers (as of today)

When you expand on each of these managers, you can see their education, the other funds they manage, and their past experiences. This should give you a good picture of who is managing your money and who can you better trust. In this case, both the funds have one manager who has recently joined (in 2019) and one who has been working on this for a few years. Canara Robeco Bluechip, in my opinion, has a slight edge over Edelweiss because the second manager has worked on it since Jul 2016 as opposed to Nov 2017.

iii. Understanding the fund in details

Apart from the points above you should also check for following things –

• Asset Allocation – Take a look at how the assets are allocated in the fund. This will instill some confidence if you still have some doubts.
• Previous performance – Previous performance is a good parameter to look at but it doesn’t guarantee that the future performance will remain the same. But if the fund has been doing well for 4-5 years and if the fund manager hasn’t changed then we can assume the trend will continue, hopefully.
• Entry and Exit loads – These are fees charged by the fund management companies when you enter the fund / exit it. It is usually ~1%. If you see any fund that is charging more than that, probably look elsewhere.

So, based on the above criterion, for the example goal that we had set, I would probably select the Canara Robeco Equity Fund.

6. Buying the Mutual Fund

Now that we have identified the one out of the sea of Mutual Funds available, we are ready to start investing money in it. I use the Coin App for this but there are a lot of options out there. I recommend to always use an app that invests into mutual funds directly rather than going to a financial advisor and paying a much larger fee.

Let’s come back to our example and buy the fund we had selected

i. Growth vs IDCW option

When you search for the selected fund you will see there are 2 options for the same fund – Growth and IDCW (Income Distribution Capital Withdrawal). In the growth option, the dividends that stocks in your portfolio give get reinvested in the same fund. In the IDCW option, the dividends are paid out to you. My recommendation is to always select the Growth option unless you need regular dividends in your bank account.

ii. Lumpsum vs SIP

After you have selected the Growth plan and you are navigated to the fund page, you will be presented with 2 options – ‘Lumpsum’ and ‘SIP’. Lumpsum is basically when you want to invest in that fund one time. This is a good option when you have big capital or have recently got your yearly bonus, etc. SIP or Systematic Investment Plan is basically when you set up recurring investments where a certain amount of money is invested every week or month or quarter depending on how you want to set it up. My recommendation is to always go with the SIP option and use the lumpsum only when you have large capital at hand.

Note – A lot of people get confused with the term SIP and associate it with Mutual Funds. SIP is an investment strategy that you can apply to any type of investment – stocks, smallcase, mutual fund, cryptocurrency, PF, etc

iii. Advanced SIP Options

When you click on Start SIP, you are presented with advanced SIP options which are mostly self-explanatory. The first option is the initial investment. This depends on the MF and some of them start with as low as 500. Then, you can select the frequency from Weekly, Monthly, Quarterly, and the date/day you want the amount to be invested. And then the installment amount. The next option is the number of installments. I usually keep it as ‘Until cancelled’. And if I need to pause or cancel it later, it is very easy to do later. And the final option is ‘Automatic step-up’ which basically means you increase your SIP by a certain percentage every year. It is a good practice to increase by at least 10% every year. But again, if you are unsure, uncheck it and it is very easy to change the SIP amount later. And finally, click on ‘Start SIP’ and you are all set!

Conclusion

Selecting a Mutual Fund to invest in might seem like a mammoth of a task. But it isn’t. And, hopefully, after this blog, you will not use that as an excuse to not invest. Let me know in the comments below if you found this blog useful and if you want me to explore a certain topic in detail. And do comment what was your first mutual fund investment after reading the blog and what goal are you investing for! Happy investing.Together, we will gain financial freedom!

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Disclaimer: I am not a financial advisor. I have no affiliations with any financial institutes. All the opinions shared in this blog are mine only. I am sharing my personal financial experiences and the knowledge I have gained over the years.