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While investing in mutual funds, most people only look at the past returns, but investing only by looking at the returns can prove to be a big mistake. Here, understand what things you should pay attention to while investing in mutual funds.

When a new investor steps into the world of mutual funds, his eyes first go to only one thing - 'returns'. Be it an advertisement on TV or the dashboard of a mobile app, everywhere it is written in big letters, "So and so fund gave a return of 40% in 1 year", "Money doubled in 3 years". Anyone can get attracted by seeing these figures and invest their hard earned money in that fund. But, is it wise to invest just by looking at the past returns? The answer is - absolutely not.

This is just like buying a car just by looking at its top speed, but ignoring its mileage, safety features, and maintenance cost. Investing in mutual funds is not just a game of returns. If you ignore some important things, then it is possible that the fund showing great returns may become the reason for your loss. Let us understand what things you should keep a close eye on apart from returns.

What to look at apart from returns? Here is your checklist

1. Your Goal and Risk Appetite

This is the first and most important step. The fund that is 'best' for someone else may not be right for you, too. Ask yourself these questions before investing:

Why are you investing money? (Children's education, retirement, buying a car?)

When do you need this money? (After 3 years, 5 years, or 20 years?)

How much risk can you take? (Will you panic or stay calm if the market falls?)

If your goal is to buy a car in 3 years, then you cannot invest in a high-risk small-cap fund. Debt funds or hybrid funds may be better for this. On the other hand, equity funds can be a good option for retirement after 20 years.

2. Expense Ratio: The silent killer of your profits

Expense ratio is the annual fee that the asset management company (AMC) charges to manage your money. It is a small percentage of the value of your total investment. You may wonder what difference 1% or 1.5% will make, but in the long run it has a huge impact on your returns.

Understand through calculations

Suppose, you and your friend started a monthly SIP of ₹5,000 for 20 years in two different funds. Both funds give an annual return of 12%.

The expense ratio of your fund is 1%.

The expense ratio of your friend's fund is 2%.

After 20 years, your total investment will be ₹59.29 lakh. Whereas, your friend's total investment will be ₹50.31 lakh. A difference of just 1% reduced your friend's investment by almost 9 lakh rupees. Therefore, always prefer the fund with a lower expense ratio.

3. Fund Manager's Track Record

The fund manager is the captain of your investment ship. The future of your fund depends on his ability and experience. Before investing, see:

Who is the fund manager and how much experience does he have?

How long has he been managing this fund?

How has his performance been during market downturns?

If a fund has recently changed its manager, there is no guarantee that its past excellent returns will continue in the future.

4. Fund portfolio: Where is the money being invested?

It is important to know which companies' shares or bonds the fund is investing your money in. Some funds are highly diversified (80-100 stocks), while some are highly concentrated (25-30 stocks). Highly concentrated funds have higher risk because if a few stocks do not perform well, the entire fund is adversely affected. Also, see whether the fund is investing as per its name or not (e.g. a large-cap fund should have most of the money in large-cap companies).

5. Risk ratio: Look at risk-adjusted returns, not just returns

Every fund has some risk associated with it, which is measured by ratios like Standard Deviation. It tells how much a fund can be volatile from its average return. If two funds are giving equal returns, the fund with lower standard deviation is considered better as it is less volatile.

6. Exit Load: The cost of early exit

Exit load is the penalty that the AMC charges when you withdraw your money before a certain period (usually 1 year). If you think you may need money in the short-term, choose a fund that either has no exit load or a very low one.

Frequently Asked Questions (FAQs)

1. What is Expense Ratio?

This is an annual fee that the mutual fund company charges for managing your money. It is a percentage of your total invested value and directly reduces your returns.

2. Why is the experience of the fund manager so important?

The fund manager decides where your money will be invested. An experienced manager understands the market fluctuations better and can take the right decisions to protect your investments during difficult times.

3. Should I stop my SIP if the market is falling?

No, stopping SIP during a market downturn can be a big mistake. Continuing SIP in a falling market gives you more units for the same money, which gives you better returns when the market recovers.

4. How many mutual funds should I invest in?

Initially, a portfolio of 3 to 4 good and different category funds (e.g. one large-cap, one mid-cap, one flexi-cap) is enough. Having too many funds makes it difficult to track them.

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