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For an investor taking his first baby steps into mutual funds investing, there is a bewildering array of choices. There are several hundred equity mutual fund schemes with a wide difference in performance between the best and the worst in terms of returns.

While some funds come up with stellar performance, there are several that fail to even meet the benchmark. Besides the existing schemes, there are a host of new fund offers lined up by the MFs. Then there are a host of proposed asset management companies planning to join the 37 already in the fray. Given the choice, investors find it difficult to choose a right partner. Here are a few things that you can look at while choosing the right fund.

Identify what you want

Many people are quite happy taking the Rajdhani Express to travel from Mumbai to Delhi. However, if you need to get there in four hours it becomes imperative to take a flight. Similarly, you need to know your investment goals and the time period required to get there.

The same holds good for investments. Know where you want to be and by when. If you can define your goal well, you can better find a solution for the same. If you are looking for earning a 15% post-tax return year-on-year, you need to have a diversified equity fund in the portfolio. But if you are content with an 8% assured return, you may consider shunning equity totally.

Look at the portfolio

Think from the portfolio point of view. First ascertain the weightage of the instruments. Consider expected returns. If you require higher returns from equity component of the portfolio, you may have to increase the weightage of ‘high risk -high return’ funds in your portfolio.

Investment objective

There has to be a congruence of goals. The fund objective should match with your objective. Also, the fund objective makes you aware of some of the inherent risks associated with the fund. For example, a fund that aims at capital appreciation in the long term by investing in FMCG stocks is riskier than a fund that aims at capital appreciation in the long term by investing in companies across sectors and across market capitalisation.

Pedigree of the fund house

Check the performance history of the fund house. Check its fund management and research expertise. The fund house must depend on an established investment process rather than a star fund manager. It has been observed that asset management companies are now more than ever willing to share this information. You should spread your money across 10 equity schemes, so that you get a proper mix for your portfolio, says Anil Chopra, Group CEO, Bajaj Capital.

Track record

Check the historical track record of the fund. Avoid funds that do well only in specific circumstances, if you cannot track the changes in market sentiment. Consistent track record is a virtue that brings peace of mind to investors. Consistent track record is sometime misunderstood as earning 25% returns every year. But it is not the case, consistency means outperforming the benchmark across time periods. You may choose to compare a fund’s performance with that of its peers.

Portfolio

Portfolio of the mutual fund is also an important variable to watch out for. Diversification is a major benefit MFs offer to retail investors. To enjoy the full benefit it is required that you invest in a well-diversified fund. In a diversified equity MF ideally, a stock should not constitute more than 10% of the portfolio and a sector should not constitute more than 25% of the portfolio.

In a sector or thematic fund, however, this may not hold good. But one could look for a portfolio that is internally de-risked by taking exposure to businesses with varying business models, varying product offerings, varying geographical exposures, etc. Or better still, you can use model mutual fund portfolios made by investment advisors. We create model MF portfolios which investors can replicate based on their investment needs, says Ashish Kehair, head of wealth management and international business, ICICI Securities.

Ease of transaction & taxation

This is a new variable. With the elimination of entry loads, not all distributors are offering a wide choice of schemes. If your dream fund is not on the menu card available with your neighbourhood distributor, better check the price you pay for investing in that fund. This is specially important if you are investing small amounts. As they say get it wrong quickly, you may realise that some of your calls have gone off target.

You may prefer to get out of a fund quickly. Hence, it makes sense to check the exit loads attached with the fund, if any. Also it’s the post-tax returns that determines the portfolio performance. Since equity mutual funds enjoy zero tax, if you hold on to them for more than one year, it makes sense to remain invested in equity funds for at least a year.