Mutual funds can be an effective way to save for important financial goals like retirement or children’s education. But with 37 fund houses offering over 500 funds, it can be difficult to select the ones that suit your specific requirement. Take this quiz to find if you can pick the right fund or need to educate yourself further.
1. While choosing a mutual fund, what is your main objective?
a) Long-term growth
d) All of the above
2. What is the best measure of a mutual fund’s performance?
c) Total return
3. How frequently is the NAV calculated?
4. Which is the best source of information on a mutual fund?
a) A good financial newspaper or magazine
b) Your financial adviser
c) The fund’s prospectus
d) The distributor who sold you the fund
5. What is the aim of an index fund?
a) Track the returns of a benchmark
b) Beat the returns of a benchmark
c) Buy stocks only in BSE 500
d) Invest in the best-performing sectors of the stock market
6. What does rupee cost averaging mean?
a) Investing a certain amount of money at regular intervals, regardless of the market conditions
b) The average cost to obtain a specific yield
c) The average cost of a specified dollar return on investment
7. What is net asset value?
a) The market value of a fund’s securities, minus expenses, divided by outstanding shares
b) The total value of securities in a fund
c) The present value of your total net holdings in a fund
8. What is the objective of a growth fund?
a) Capital appreciation
b) Value retention
c) Dividend payout
9. Is it true that there is an inverse relationship between risk and reward?
10. Is it true that in a no-load fund, the buying price is the same as the NAV?
Answers: 1. d; 2. c; 3. a; 4. c; 5. a; 6. a; 7. a; 8. a; 9. b; 10. a.
Over 8 correct: If you aren’t investing in MFs, start now
5-7 correct: Read more on MFs before you start investing.
Less than 5: You need to read Money Today more often!
Evaluating a fund
Here are some important factors you should consider before investing in a mutual fund.
- Do the fund’s goals and objectives match yours for the long term.
- How do the selected fund’s expenses compare with the average comparable fund?
- What are the loads (entry/exit) and the fund management fee that are charged?
- What is the annual expense ratio of the fund?
Fund manager’s tenure
- How long has the fund manager been in his current post?
- Has the fund’s performance record been created by a manager who has left?
- How do the fund’s returns compare with those of its peers?
- How good is the fund’s long-term performance?
- Will you hold the fund when the market is down?
- How does the fund’s risk level compare with similar funds?
Costs to watch out for
- Entry load: This is the fee that is charged by the fund house when you enter a fund. The load is waived if you invest directly, instead of through a broker.
- Fund management charge: These are the annual charges paid to AMCs for managing the fund.
- Exit loads and taxes: Exit loads are charged if you exit a fund before a stipulated date. One should also be aware of the tax implications while exiting a fund within a year.
Parameters to compare funds
- Find out the returns earned by both the funds for the same time period.
- Check the performance compared to the benchmark that the funds are pegged to.
- Look at the expense ratio of the funds.
- The quality of assets that the fund has invested in.