Investing in mutual funds in India: Why 2023 is the year to take action (2024)

Mutual funds have become an increasingly popular investment option for Indians in recent years. With the market experiencing significant growth and changes in the past few years, choosing the right mutual fund has become crucial to maximise returns on investment. In this article, we will discuss some key factors to consider while selecting mutual funds in India in 2023.

Identify your investment goals

The first step in selecting mutual funds is to identify your investment goals. Whether you are investing for short-term or long-term goals, such as retirement, children’s education, or buying a house, your investment goals should align with the fund’s investment objective. For example, if your goal is to generate income, you should opt for income-oriented funds such as debt funds. If your goal is wealth creation over a long period, you may consider equity-oriented funds.

It is important to note that your investment goals may change over time, and you may need to modify your investment strategy accordingly. You should review your investment goals periodically and make necessary adjustments to your mutual fund portfolio.

Moreover, you should also consider your risk tolerance while selecting mutual funds. You should invest in funds that match your risk profile and align with your investment goals. If you have a low-risk tolerance, investing in debt funds may be a better option compared to equity funds.

Assess the fund’s past performance

Before investing in a mutual fund, it is important to review its past performance. You should consider the fund’s returns over the last few years and compare it to its benchmark and other similar funds. While past performance is not a guarantee of future returns, it can give you an idea of the fund manager's investment strategy and how well it has worked in the past.

You should also consider the consistency of the fund’s performance over different market cycles. Funds that have delivered consistent returns over the long-term are generally preferred over those that have fluctuated widely. It is also important to note that the performance of the fund should be evaluated in the context of the market conditions prevailing at the time.

Additionally, you should also consider the fund’s volatility while assessing its past performance. Funds with high volatility may not be suitable for all investors, especially those with a low-risk tolerance.

Evaluate the fund manager's expertise
The fund manager plays a critical role in the performance of a mutual fund. Hence, it is essential to assess the fund manager's experience and track record. You can research the fund manager's investment style and evaluate their experience in managing the fund.

You should also consider the stability of the fund manager's tenure. Funds that have had frequent changes in their fund managers may not be preferred over those with a stable fund management team.

Moreover, you should also evaluate the fund manager's ability to manage the fund's assets under different market conditions. Fund managers with a proven track record of managing the fund's assets in various market conditions are generally preferred over those with limited experience.

Analyse the fund’s portfolio
Another important factor to consider while selecting mutual funds is the portfolio composition. You should review the portfolio holdings and assess the fund’s asset allocation strategy. The fund should invest in a diversified portfolio to minimise risks associated with specific sectors or stocks.

You should also consider the quality of the portfolio holdings. Funds that invest in high-quality stocks with strong fundamentals are generally preferred over those that invest in low-quality stocks.

Moreover, you should also assess the concentration risk associated with the fund's portfolio holdings. Funds with high concentration risk may not be suitable for all investors, especially those with a low-risk tolerance.

Consider the fund’s expense ratio
Mutual funds come with an expense ratio, which is the fee charged by the fund house for managing the fund. While expense ratios may vary across fund houses, you should consider the expense ratio of the fund you plan to invest in. Lower expense ratios are generally preferable as they can significantly impact your overall returns in the long run.

You should also consider the impact of other fees and charges associated with the fund, such as exit loads, transaction fees, and service fees. These charges can significantly impact your returns and should be evaluated while selecting mutual funds.
Moreover, you should also consider the tax implications associated with the fund's expense ratio. Funds with lower expense ratios may be more tax-efficient compared to those with higher expense ratios.

Check the fund’s risk profile
Mutual funds come with varying levels of risk associated with them. You should assess the risk profile of the fund and understand the risks associated with the investment. High-risk funds, such as small-cap or mid-cap funds, may offer higher returns, but they also come with higher volatility and risk.

You should also evaluate the fund's risk management strategy. Funds with a robust risk management strategy are generally preferred over those with a weak risk management framework.

Moreover, you should also assess the fund's exposure to specific sectors or stocks. Funds with high exposure to specific sectors or stocks may not be suitable for all investors, especially those with a low-risk tolerance.

Look for tax efficiency
Mutual funds can be tax-efficient investment options if selected wisely. You should consider investing in tax-saving funds such as Equity-Linked Savings Scheme (ELSS) or debt funds to minimise your tax liabilities. Moreover, it is also important to consider the tax implications of your investment returns while selecting mutual funds.

You should also consider the impact of capital gains tax, dividend distribution tax, and other taxes while selecting mutual funds. Funds that are tax-efficient and provide higher post-tax returns are generally preferred over those that are not tax-efficient.

In conclusion, selecting mutual funds requires careful consideration of various factors such as investment goals, past performance, fund manager's expertise, portfolio composition, expense ratio, risk profile, and tax efficiency. By evaluating these factors, you can select the right mutual fund that aligns with your investment goals and maximises your returns on investment. With the market expected to witness significant growth in the coming years, 2023 is the year to take action and invest in mutual funds.

Views are personal: The author - Adil Behram Driver is a Mutual Fund Distributor and trademark owner of WAVES – Wealth AVEnueS ® (https://www.w-aves.com)

Disclaimer: The views expressed are of the author and are personal. TAMPL may or may not subscribe to the same. The views expressed in this article / video are in no way trying to predict the markets or to time them. The views expressed are for information purposes only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you. Please consult your Mutual Fund Distributor before investing. There are no guaranteed or assured returns under any of the scheme of Tata mutual Fund.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.