How to pick Best Mutual Funds for Long Term Investment?

You can invest small amounts in mutual funds every month through Systematic Investment Plan (SIP) and create good corpus in long term. Picking up a good mutual fund scheme for investment is always a challenge. There are a few parameters which can be looked at while analyzing mutual fund schemes. In this article, I would provide some tips on how to pick best mutual funds to invest.

How to pick Best Mutual Funds for Long Term Investment?

a) Pick mutual fund scheme based on your risk appetite
Risk appetite is how much risk you are willing to take by investing in mutual fund schemes. You may have high risk appetite, medium risk appetite or low risk appetite. If you are high risk appetite investor, investing in equity mutual funds would be best bet. Equity funds invest in large cap, mid-cap and small cap stocks and are high risk, however would out-perform well in long run. If you are moderate risk taker, investing in hybrid mutual funds would help you, as it invests partly in debt instruments which would reduce your risk. If you are low risk taker, better to invest in debt funds. These debt funds would invest in fixed income options and debt instruments, hence these are relatively low risk options.

b) Pick top rated mutual funds schemes for investment
Mutual fund schemes are rated by credit rating agencies or by experts in mutual funds field. In India, Crisil, one of the top credit rating agency, rates mutual funds as Rank-1 to Rank-5. Rank-1 refers to “very good performance in the category” and Rank-5 refers to “Very weak performance in the category”. Means, you should pick-up mutual fund schemes which are rated as Rank-1 or Rank-2 and stay away from Rank-3 to Rank-5 schemes. Some more experts like Value Research Online rates mutual fund schemes by giving Star Rating from 1-Star to 5-Stars. More stars refers to good fund and less stars refers to worst mutual fund scheme. These ratings would help in in choosing a good mutual fund scheme for investment.

c) Pick mutual funds that are consistenly performing well
There could be some funds which might be doing well in short term, but have worst performance in long run. You should ignore such mutual funds. If a mutual fund scheme is consistently performing well in long run with superior returns, you can invest in such mutual fund schemes. Consistent performance indicates that it is able to overcome various market fluctuations and able to deliver better returns in long run.

d) Pick funds that have good Assets under Management (AUM)
This is another key parameter in choosing a good mutual fund scheme. AUM is the value of investments in mutual fund scheme. Higher AUM refers that investors have high trust in such scheme and pumping more money for investment. You should ignore mutual fund schemes that have low AUM, though they might be performing well. If you are planning to choose a good mutual fund scheme in India, you should consider funds that have AUM of over Rs 100 Crores.

Conclusion: Investment in mutual funds would help investor to grow money in long run. Pick up the best performance mutual funds with above tips and I am sure you would be able to create good wealth over a period of 7 to 10 years. Remember to invest in mutual funds through Systematic Investment Plan (SIP) regularly so that you would be able to get superior returns.
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Suresh KP

Author's Bio: 

I am founder of Myinvestmentideas blog that talks about various Best Investment Options in India and Money saving Ideas