How to Avoid a bad Mutual Fund?

How to Avoid a bad Mutual Fund

A bad mutual fund can be picked randomly without following some basic tips, and fundamental analysis before choosing any mutual fund. We have all heard the benefits of investing in a mutual fund over trying to pick individual stocks. 

First of all mutual funds hire experienced analysts that are market experts and righteous many hours of study to the various stocks. Unless you want to devote a large portion of your free time to the analysis of the financial reports, you likely won’t have as much information to make a decision as a mutual fund manager to pick the right one to avoid a bad mutual fund. 

A Bad Mutual Fund

Then there is the well-documented benefit of diversification of portfolio. Risk is reduced by holding several non-correlated assets in your investment. Put simply, some go up, some go down and combined, the return levels off the oscillations, or risk.

Finally, a mutual fund offers smaller investors the possibility to invest in small increments rather than having to save a large chunk of money to purchase 100 shares of stock.

Given the above advantages, it’s no wonder that mutual funds have become a very popular form of investing over a period of time. Now there are thousands of mutual funds in the market to choose from, so how does one make a selection? 

Here are a few tips to avoid bad mutual fund:

  1. Do not be seduced to jump on the newly performing best fund. It may seem like a safe and rational item to do, but like individual stocks, you want to buy low and sell high, not buy high and beg for more growth.
  1. Even good mutual funds may not be able to overcome the force of the overall market. You should be looking for funds that can exceed the broad market without increasing risk factors. Each fund has specific risk parameters that it is required to follow. Read the prospectus closely to comprehend what these are.
  1. Limit the number of mutual funds that you own. Unless you are trying to simply achieve the same returns as the broad market, diversifying into many bad mutual funds will not reduce your risk or increase your return by much.
  1. Mutual Funds that become too popular and too big manage to slip in performance. There are several explanations for this.
  1. The lower the NAV (net asset value) of any mutual fund, the better return will get but it doesn’t simply mean it is going to perform well. You have to analyse proper funds analysis to avoid bad mutual funds. Every investor knows that to earn good returns, the simple mantra is “buy low and sell high”. And this is a vision that they try to apply to every investment product. 
  1. Many new investors invest in new fund offers (NFOs) with the hope to invest at a base price as low as INR 10. But they fail to comprehend that even for an NFO, the price at which it buys its underlying securities is the same for every other player in the stock market.
  1. The NAV at which you are able to buy the mutual fund units is not important, instead, it is what price the fund manager buys the underlying securities at that is significant. 
  1. Everyone wants to have guaranteed returns on their investment, irrespective of what type of mutual fund investment they choose. But there are no guaranteed returns in any mutual funds, it can a bad selection of mutual funds. 
  1. Every fund commercial precautions you that ‘mutual funds are subject to market risk’; which means that the returns yielded from mutual funds will fluctuate as per the volatility in the market. 
  1. Past performance of a fund does give us a fair idea of how efficient the fund manager was in picking up the right stocks at the right time or whether it is turning into a bad mutual fund. But that was in the past performance. There is no guarantee that the fund will repeat its past performance in future too.
  1. Don’t try to compare the performance of a small-cap fund with large-cap funds, as both the mutual funds invest in different sets of stocks. For example, you cannot approximate the performance of SBI Bluechip Fund with SBI Small Cap Fund as both of them invest in different pools of stocks. A details comparison of different funds lets you pick a bad mutual fund. 
  1. Investing your saving without a goal is like a car without a steering wheel and unfortunately, most individuals invest without proper planning. A goal-based investment helps investors to decide on the right asset allocation required for their portfolio and avoid a bad mutual fund. 

Also Read: Have You Made A Bad fund Investment?

  1. Try to avoid overvalued funds, it can be a bad mutual fund for your goal. A stock can be overvalued or undervalued but you cannot apply the same metaphor to a fund. This is because it is the job of the fund manager to specify valued stocks properly as per the objective of the portfolio

One final point to keep in mind is that the type of mutual fund will totally depend on your investment objectives. There are specific funds that are designed for your objectives be they retirement, income, growth, funding the kid’s college, etc. Don’t fall for a bad mutual fund. Before investing analyse all the requirements and the fund manager’s track record. 

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