Selecting a Mutual Fund

Back to Basics: We know mutual fund is something where a lot of people put in their money expecting knowledgeable hands and minds to put this money in the right pockets to get them profits on idle money. 

There are fund houses that manage these funds and within these fund houses are specific fund managers who manage individual funds, i.e., they decide how much money should be invested in which instruments and for how long. 

Basically, you are eventually depending on 1 person's experience and knowledge to invest on your behalf and which is the right thing to do when you do not completely understand the dynamics of investing.

Now to understand everything better, we should see inside a fund and the fund manager. We will first use the information of a fund to understand what is it that we directionally wish to invest in and for that we will need to use the Scheme Information Document, Key Information Memorandum & Statement of Additional Information that is shared by the fund houses. There are many websites that can be used to filter down and understand the funds. 

Important elements of fund document

Scheme Information Document (SID)

This is a document that gives you all fundamental details of a fund including its objective, fund allocation details, details of the fund manager/ fund management team, benchmarks, related costs (e.g., entry/exit loads), risks involved and the mitigation plan, tax implications and any limits on withdrawal of funds. 

Statement of Additional Information (SAI)

This covers the changes in scheme, details on fund composition, AMC’s, authorities, regulations, general, financial & legal fees and information. 

Key Information Memorandum (KIM)

This document is more like a quick summary of the fund, mostly presented as the factsheet of the fund. It covers the objective of fund (e.g. increasing value, keeping capital safe, etc.), past performance, associated fee, risks and investment and withdrawal terms.

Once the above information is used and you have been able to filter down to funds that maybe of interest to you, you now want to understand more about your fund manager and his past experience performance and returns. it may also be useful to understand the current fund as against the previous point start this fund manager or this fund management team has managed to ensure that the past experience actually reflects the experience in reference to the current fund that you want to invest in. 

There will be a lot of subjectivity in deciding a good fund manager and you may not necessarily find one single answer but what you really want to do is find a fund manager that you're able to relate to, where the philosophy of investment works in the way you think and where the equity allocation works in line with the government policies and thus gets the maximum benefit from the current affairs.

You also have to keep in mind that the funds that you invest him should have minimum or zero entry and exit loads because that has direct impact on the capital that you're investing or on the interest that you're going to harvest.