December 7, 2023

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Is it essential to compare multiple mutual funds before investing?

Should You Invest In Similar Mutual Funds? - Angel Bee

Today, investors are spoilt for choice. Mutual funds have become an integral part of all investor portfolios, thereby leading to their immense growth. Depending on the risk profile, an investor can choose equity, debt, or hybrid mutual funds. These three broad categories of funds comprise multiple sub-categories. In all, investors have the option to choose from over 8,000 mutual funds. But with more choices come greater responsibilities. To make suitable investments, investors must compare mutual funds before they make a final decision.

Here are some aspects investors should consider to compare mutual funds:

  • Investment objective: Each category and each sub-category of mutual funds has an investment objective. Equity funds are divided into large-, mid-, small-, and multi-cap funds – all of these have a different investment objective. For instance, large-cap mutual funds have an investment objective to earn returns by investing in companies with a large market capitalization. Similarly, debt mutual funds also have various subclasses, each with an individual investment objective. It is vital to compare these funds based on their investment objective because the portfolio manager works as per the specified criteria, and investors should pick a scheme depending on their financial goals.
  • Benchmark: All mutual funds are benchmarked against a particular index. For instance, let’s say X scheme is tied to the Nifty 100 total return index, and the fund gains 18% against the benchmark 15%. In this case, the particular scheme has outperformed the index. However, if the mutual fund earns only 10%, then it has underperformed the index. Compare mutual funds based on their performance against the benchmark and choose a fund with consistent returns.
  • Risk: All mutual funds have different risk profiles. Equity mutual funds carry more risk, whereas debt mutual funds have low risk. Hybrid mutual funds carry moderate risk. The sub-categories of these funds also have different risk types. The degree of risk depends on the underlying investments of the funds. Investors should compare mutual funds based on their risk degree and choose the scheme that aligns with their risk capacity.
  • Returns: Historical returns are an important determinant of a mutual fund scheme’s performance. That is why it is necessary for investors to compare mutual funds on their historical performance across different market cycles. Investors can check the SIP or lump sum returns over the years to compare the performance of mutual funds.
  • Expense ratios: Mutual funds come with specific charges like expense ratios and exit loads. These charges cover the management, administration costs, redemption, etc. Higher the mutual fund expenses, lower the overall returns. Hence, investors should compare mutual fund expenses and look for one that has a low expense ratio. However, it is essential to remember that a low expense ratio does not guarantee high returns.
  • Regular vs. direct investment: Investors have an option to choose direct or indirect investment plans. Investors who want to engage with individual fund houses directly and have a strong market understanding can consider investing in direct plans. Alternatively, investors can also choose regular mutual funds, which are investments through brokers, advisors, or distributors. These intermediaries sell mutual funds for a fee. 

Evaluating different mutual funds can help investors understand the fund’s potential returns, riskiness, investment objective, and quality. Apps like the Tata Capital Moneyfy app make it easier for individual investors to compare mutual funds as per the above criteria and make an informed decision.