Finally, you have settled on your allocation for equity and debt funds. The challenge now is to identify the specific funds to invest in. With over 40 Asset Management Companies (AMCs) offering hundreds of different schemes, plans and options, it’s no mean feat to choose what’s best. What should you keep in mind when investing in mutual funds? Is there a list of metrics and parameters to consider? This involves both quantitative and qualitative factors. Here are 6 significant points to bear in mind when it comes to selecting mutual funds: this is your framework.

The most essential factor to ponder is what your overall investment objective is. Are you attempting a conservative or aggressive approach? Additionally, it is important to evaluate the fund’s objectives, and if they remain constant. If you search for a consistent income stream and stability, then there is no necessity to buy a debt fund that follows a more dynamic rate management. And in case of equity performance that compares to the index, investing in index funds will be more advantageous as it reduces the risk associated with equities as well as their higher expense ratios.

We all understand that past performance is not a reliable predictor of the future, but with mutual funds it does carry significant weight. It’s usually more attractive to see 15% returns with low volatility than 17% returns with high volatility. If your fund doesn’t deliver above-index returns over an extended period, you’d probably be better off sticking with passive investments like index funds and ETFs. Furthermore, evaluating returns on a risk-adjusted basis is important – 16% return with moderate risk is preferable to 19% return with high risk. This is where Sharpe and Treynor ratios come in useful.

You may be asking why the longevity of a fund management team is important? To answer this question, there must be a strong consistency in investment strategy and coordination between dealers, traders, researchers, the CIO and the CEO. Fund managers tend to stay with a successful fund that they are pleased with. However, if not, then they will seek other opportunities. It is evident that funds which achieve better results over the long run generally have been managed by stable teams who provide continuity to their decision making processes.

When making decisions about investing, you need to consider the costs that are charged to you directly as well as those that are taken out of your NAV in the form of expense ratio. There used to be entry loads, which no longer apply; however, if you leave a fund before the stipulated time period you will still be subject to exit loads. In addition, there are transaction fees, operational costs and administrative charges associated with each fund. Fund management companies must provide full disclosure regarding these expenses and their breakdowns; equity funds usually have an expense ratio between 1.5-2%, whereas index funds tend to have lower rates. To ensure that the cost is worth it, compare the fund’s returns with its expense ratios.

It is important to comprehend the implications of these, as they are applicable to all funds. For instance, should you decide to sell equity funds before one year, it will attract a Short Term Capital Gains (STCG) tax of 15%. On the other hand, if your plans involve selling debt funds before three years; then a STCG tax of 30%, the peak rate, will be applicable. Furthermore, any gains over Rs.1 lakh from the sale of equity funds made on or after April 01st 2018, would be taxable at a flat 10% rate without indexation benefits. Moreover, exit loads may range from 0.5% for larger funds to 1% for smaller ones which could considerably affect your return on investment.