Factors Influencing Mutual Fund Investment Decisions 1

Key factors influencing investment decisions in various streams of mutual funds

i i i i i i i i i i

-By Priyansh Bachani (FE-0222-10223)i i i

Mutual funds have been categorized as per the norms laid by the Securities and Exchange Board of India (SEBI).
i i i i i i i i i i i i i i i i i i

All the fund houses or Asset Management Companies (AMCs) must launch mutual fund schemes in all categories
i i i i i i i i i i i i i i i i i

as per the SEBI regulations. You can choose from a plethora of MF schemes but first, you need to decide the
i i i i i i i i i i i i i i i i i i i i i

category that can match your investment purposes. Consider the below factors:
i i i i i i i i i i i

1. Identify Your Investment Goals

i i i i

Know your investment goals, i.e. identify whether you seek growth or value. You should invest in equity funds or
i i i i i i i i i i i i i i i i i i

aggressive hybrid funds if you want high returns. But these funds also come with high risks, so if you would want
i i i i i i i i i i i i i i i i i i i i i

to park your money somewhere which is not easily influenced by market volatility, then you should consider bond
i i i i i i i i i i i i i i i i i i

funds. You should plan out your objectives, like whether you want to have a retirement fund, fund children’s
i i i i i i i i i i i i i i i i i i

education or wedding, have an emergency fund for urgent requirements, medical expenses or other
i i i i i i i i i i i i i i

mishappenings, etc.
i i

2. Time Horizon
i i

Investment goals and time horizons go hand-in-hand. You can actually set your objectives as per the time duration i i i i i i i i i i i i i i i i i

you want to stay invested for. Long-term goals allow you to focus on growth-oriented equity funds, as you can
i i i i i i i i i i i i i i i i i i i

have ample time to ride through the upheavals of the market, for example – retirement funds. Mid-term goals
i i i i i i i i i i i i i i i i i i

should have a balanced portfolio of growth and value funds that provide good returns and stability against market
i i i i i i i i i i i i i i i i i i

volatility.
i

3. Risk Tolerance
i i

One of the major factors to consider before investing is to measure your risk tolerance, meaning that you should
i i i i i i i i i i i i i i i i i i

evaluate whether you wish to play safe or take some risks and whether you have a high-risk tolerance or moderate
i i i i i i i i i i i i i i i i i i i i

risk appetite. Based on your risk tolerance, you can bear the market volatility and choose the funds to invest
i i i i i i i i i i i i i i i i i i i

accordingly. Risks and returns are directly proportional, so know if you want to take an aggressive route or have
i i i i i i i i i i i i i i i i i i i

a conservative approach towards your mutual fund investments.

i i i i i i i i

Factors to Consider Before Choosing a Mutual Fund Scheme i i i i i i i i

First and foremost, investors must understand that choosing the category and the scheme of a mutual fund are two
i i i i i i i i i i i i i i i i i i

different things. Plenty of mutual fund schemes can exist in one mutual fund category. Investors should decide on
i i i i i i i i i i i i i i i i i i

the category as per the factors mentioned above and then consider the below-mentioned factors to opt for a mutual
i i i i i i i i i i i i i i i i i i i

fund scheme:
i i
 Factors Influencing Mutual Fund Investment Decisions 2

1. Fund Performance
i i

Investors should consider the fund performance of the mutual fund scheme before investing. Compare the 3-5
i i i i i i i i i i i i i i i

year performance against the benchmark as well as the category of the fund along with the consistency of the
i i i i i i i i i i i i i i i i i i i

performance. The asset allocation of a fund should match the benchmark index, that is, they must have similar
i i i i i i i i i i i i i i i i i i

objectives. For example, small-cap fund schemes will be compared against a small-cap benchmark. Similarly, you
i i i i i i i i i i i i i i i

should compare with other schemes in one fund category. Benchmark indices are the standard against which a
i i i i i i i i i i i i i i i i i

fund’s performance, and the asset allocation, are compared.

i i i i i i i i

2. Net Asset Value

i i i

Net Asset Value (NAV) refers to the market value per unit of mutual funds and is often a key factor for many
i i i i i i i i i i i i i i i i i i i i i

investors. Mutual funds with high NAV are expensive and can also offer lesser growth whereas the ones with
i i i i i i i i i i i i i i i i i i

lower NAV cost less and give more growth opportunities. However, sometimes a mutual fund with a higher NAV
i i i i i i i i i i i i i i i i i i

may invest in quality stocks and bonds to give good returns to investors and hence, can be more reliable than
i i i i i i i i i i i i i i i i i i i i

mutual funds with a lower NAV. Therefore, while the NAV is important, it cannot be the deciding factor for
i i i i i i i i i i i i i i i i i i i

investment in any mutual fund scheme, so you must consider the other parameters as well.
i i i i i i i i i i i i i i i

3. AMC Performance
i i

Investors should check the performance of AMCs just like they check the fund performance. All fund houses have
i i i i i i i i i i i i i i i i i

plenty of schemes under them, and some investment decisions are made at the AMC level. For instance, you may
i i i i i i i i i i i i i i i i i i i

find certain stocks in most of the schemes that were selected by the CIO (Chief Investment Officer) at the AMC
i i i i i i i i i i i i i i i i i i i i

level. Some funds may underperform but the overall track record of an AMC matters the most. It reflects the
i i i i i i i i i i i i i i i i i i i

investment decisions that are made and how fund schemes may perform in the future.
i i i i i i i i i i i i i i

4. Expense Ratio
i i

All funds come with some costs and fees, which include managerial and operational charges as mutual funds are
i i i i i i i i i i i i i i i i i

schemes managed by professional individuals. Fund managers research, analyze and do timely investments and
i i i i i i i i i i i i i i

withdrawals from stocks and bonds to generate good returns on behalf of the fundholders. These are the charges
i i i i i i i i i i i i i i i i i i

for management, promotion, administration, and distribution of a mutual fund. Most expense ratios are
i i i i i i i i i i i i i i

somewhere between 1-2% and some of them are lower than 1%. It is important to check the expense ratio as even
i i i i i i i i i i i i i i i i i i i i i

the slightest difference can impact your wealth growth significantly. The Securities & Exchange Board of India
i i i i i i i i i i i i i i i i

(SEBI) has capped the expense ratio at 2.25% of the total fund assets by capital markets that an Asset Management
i i i i i i i i i i i i i i i i i i i i

Company (AMC) can charge.

i i i i

5. Exit Load
i i

Just like the expense ratio, some funds also have an exit load if you make a premature exit from the fund. So, you
i i i i i i i i i i i i i i i i i i i i i i

must check if the schemes have any exit load or they are free from it.
i i i i i i i i i i i i i i i
 Factors Influencing Mutual Fund Investment Decisions 3

6. AUM (Assets Under Management) of the AMC

i i i i i i i

AUM (Assets Under Management), as it indicates, is the total assets that are being managed by a mutual fund
i i i i i i i i i i i i i i i i i i

scheme. A larger AUM indicates a larger fund corpus from the collection of funds from investors and also
i i i i i i i i i i i i i i i i i i

indicates that more investors are involved. A larger AUM for equity funds makes it tough for the fund to enter or
i i i i i i i i i i i i i i i i i i i i i

exit the companies but it is favorable in the case of liquid funds or other short-term debt funds.
i i i i i i i i i i i i i i i i i i

7. Experience of the Fund Manager

i i i i i

SEBI has mandated all AMCs to declare the asset allocation as well as the details of the fund managers. It is
i i i i i i i i i i i i i i i i i i i i

advised that you check the qualifications and experience of the fund managers, what funds they have managed
i i i i i i i i i i i i i i i i i

and how those funds have performed, etc. You should know if the fund managers could deliver the results
i i i i i i i i i i i i i i i i i i

outperforming the benchmark indices or matching them before you decide to invest in a fund managed by a
i i i i i i i i i i i i i i i i i i

particular fund manager. Also, note that if the returns were consistent or more volatile than market indices. The
i i i i i i i i i i i i i i i i i i

management of the fund should also be taken into consideration, whether they are actively or passively managed.
i i i i i i i i i i i i i i i i i

At times, the longevity of the fund managers on a scheme also matters, because if a fund is performing well, then
i i i i i i i i i i i i i i i i i i i i i

fund managers will stick to it.

i i i i i i

Conclusion:
Mutual funds selection is a two-step process, selecting the category and then the scheme, suiting the individual’s
i i i i i i i i i i i i i i i i

goals and risk appetite. Checking the fund type, its performance, track record of the AMC, and that of the fund
i i i i i i i i i i i i i i i i i i i i

managers are a few factors you must keep in mind. Also, check how much the scheme loads on you through its
i i i i i i i i i i i i i i i i i i i i i

operational fees and exit charges along with the volatility of the scheme. Additionally, tax implications of all
i i i i i i i i i i i i i i i i i

categories of funds, depending on the long-term or short-term gains must be borne in mind before investors arrive
i i i i i i i i i i i i i i i i i i

at a decision.
i i i

Sources:

• 5paisa
• Upstox
• Groww
• Mastertrust
• Angelone
• CFI
• Paytm