How to Choose an Equity Mutual Fund

Last Updated at: Oct 08, 2020

There’s no telling how the market will perform in the future, so past performance is never an indicator of future success. While you may still end up picking funds that are currently top performers, here’s what to evaluate before picking them:

Fund’s Objective:

Always read the aim of the mutual fund. This is to be found in the prospectus of the fund. HDFC Equity’s objective, for example, is to achieve capital appreciation, whereas HDFC Infrastructure’s is long-term capital appreciation. Pick funds whose aims are the same as yours. Also, novice investors are better off with open-ended – , not closed-ended – funds, which can be sold on demand and depend only on the value of the fund’s investments. Closed-ended funds are more complicated, as they are traded just like a stock.

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Fund Management:

The fund manager decides where your money is invested, so he or she had better be more than competent. You can find out which funds the manager has worked with in the past and find out how well they performed. You can also compare the performance of the fund to other funds in its category. Consider information of at three to five years while making your decision.

Size of the Fund:

Small funds don’t usually receive the right information and may find it difficult to allocate their resources at the right time. On the other hand, a fund with a very large corpus (HDFC Equity with assets of nearly Rs10,000 crore, for example) may find it difficult to allocate even a small percentage of its corpus to a small-cap stock. Therefore, it may have to only invest in large-cap companies.

Expense Ratio:

You are charged for your mutual fund investment each year. The charges are a portion of the operating costs, management fees, and audit fees. Small fund houses, on average, have higher costs than large fund houses. While a high expense ratio isn’t reason enough to keep from investing in a good fund, it should be considered while evaluating returns.