Mutual fund scheme selection

With a plethora of schemes available for investing in and many more to come, one may find it difficult to arrive up on any decision to select a suitable scheme. In this article we are giving a few guidelines to arrive at the best possible scheme.

In the US, there are more mutual funds listed at the stock exchange than companies. In India, the mutual fund sector appears to be heading towards the same situation. From just one mutual fund in 1993 that is Unit Trust of India offering about 50-odd schemes, today we have 30 mutual funds offering about 1,000 schemes.

And the numbers don’t stop here. We have at least 5 new mutual funds who want to enter India. At an average of 30 schemes issued per mutual fund, we will see an additional 150 schemes available for investment. In addition, existing fund houses will continue to launch new schemes, which will further add to the list.

First check out the scheme’s investment objective to be clear about which investment options the investor is comfortable putting his money in. If the investor is a risk-taker then he can go for equity oriented schemes. Equity oriented schemes that can be considered in this case such as diversified equity funds, sector funds, index funds, exchange traded funds, etc. If the investor preference is to avoid risks, he can go for debt-oriented schemes such as income funds, gilt funds, floating rate funds, capital protection schemes, etc. Read the investment objective to understand where the fund manager will invest your money and what investment strategy he will follow.

Check out the returns offered by the scheme over different time periods (1 month, 3 months, 6 months, 1 year, 3 years, etc.) Evaluate the returns offered by the scheme with the average returns offered by the category the scheme falls in (e.g. diversified equity, index funds, etc.).

Find out the amount of expense the fund is incurring to run the scheme. This is usually declared as a percentage of the fund’s corpus. Compare this with the expense incurred by other funds in case of similar schemes. Needless to say, a low expense ratio is a positive aspect.

Make sure the corpus size of the scheme is neither too small nor too large. A very small corpus size puts the scheme at risk in case of large redemptions while a very large corpus size is difficult to manage. Compare the corpus size of the schemes with other similar schemes to make this judgment.

The portfolio of the scheme i.e. the investments made by the scheme on behalf of its investors must be checked out to make sure the investments made are less risky and returns are reasonable. Also assess the change in the portfolio over 3-6 months to assess the fund manager’s investment strategy. For instance, if the portfolio has changed significantly, find out which companies the fund manager has exited from and which companies he has invested into. This will give an idea about which sectors (pharmaceutical, IT, auto, etc.) the fund manager is investing in.

All these parameters imply that an investor should not invest in New Fund Offerings (NFO). This is a strong advice – avoid NFO and stick to existing schemes. However, if a new scheme is launched, which has no comparable scheme in existence (such as gold exchange traded funds or real estate mutual funds), then consider the NFO.

The easiest source is the Internet, where the potential investor can get all this information. Websites focusing on mutual fund such as, and,, etc. can be visited and studied on line. These websites give information on schemes in an easy-to-comprehend format. Additionally, they offer you analysis on schemes, press releases on schemes, etc.

The investor must do his own study before making the investment after all he is the keeper of his own money. No matter how tempting or strong are the recommendations you receive from ‘knowledgeable’ friends, advisors, etc., do not invest your money in these until a thorough study is made by you. Nobody else is really concerned about your money.

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