How to select a Mutual Fund

Selection parameters
Your objective: The first point to note before investing in a fund is to find out whether your objective matches with the scheme. It is necessary, as any conflict would directly affect your prospective returns. You should pick schemes that meet your specific needs. Examples: pension plans, children’s plans, sector-specific schemes, etc.

Your risk capacity and capability: This dictates the choice of schemes. Those with no risk tolerance should go for debt schemes, as they are relatively safer. Aggressive investors can go for equity investments. Investors that are even more aggressive can try schemes that invest in specific industry or sectors.

Fund Manager’s and scheme track record: Since you are giving your hard earned money to someone to manage it, it is imperative that he manages it well. It is also essential that the fund house you choose has excellent track record. It also should be professional and maintain high transparency in operations. Look at the performance of the scheme against relevant market benchmarks and its competitors. Look at the performance of a longer period, as it will give you how the scheme fared in different market conditions.

Cost factor: Though the AMC fee is regulated, you should look at the expense ratio of the fund before investing. This is because the money is deducted from your investments. A higher entry load or exit load also will eat into your returns. A higher expense ratio can be justified only by superlative returns. It is very crucial in a debt fund, as it will devour a few percentages from your modest returns.

Purchasing mutual funds
Purchasing during NFO: Like companies, which have initial public offering (IPO), Mutual funds have New Fund Offer (NFO). It is when they launch the scheme for the first time. You can buy units at par on this occasion. However, it is not always advantageous to buy a mutual fund during IPO. You can always wait and see the performance before investing in it.

Purchasing existing mutual fund units: You can buy units of an open-end scheme anytime at NAV-related price. Most mutual funds charge an entry load. That means you have to pay an additional % of the NAV to get into the scheme. You can buy the plan directly from the mutual fund or brokerage.
Selling mutual funds

You can sell or redeem units very easily. As per SEBI guidelines, a mutual fund unit holder has the right to receive redemption or repurchase proceeds within 10 days of the redemption or repurchase. Most funds do not charge an exit load these days. But check before investing.

When should you sell a mutual fund unit is a crucial question. Ideally, you should sell it when you have met your target profit. The other reason is that you need the money or your profile has changed due to some changes in your life. Other than this, you should sell the units if you find that the fund has been taken over by another fund, which you do not approve of. Any major changes in the objective of the fund or a sharp rise in expenses could also be valid reasons to redeem units. Following a favorite fund manager is also a usual practice. However, it need not be always rewarding.

Income from mutual funds: the options
Mutual funds distribute their income as dividend. An investor has the option of receiving the dividend or opting for the dividend reinvestment or growth. If an investor needs the income, he can opt for dividend payout option. However, if you do not need the money, you can opt for dividend reinvestment. In the growth option dividend is not declared. Here the income is generated from sale of securities.
Speedy investment, redemption and income receipts

Thanks to the Electronic Clearing Services (ECS), mutual fund investor now has the option of automatic credit of dividends and redemptions into bank account. This will save a lot of paperwork, for both you and the fund. You can also instruct your bank to automatically withdraw a certain sum towards systematic investment plan. Alternatively, you can also directly receive systematic withdrawal proceeds in your bank account.