How to choose a suitable mutual fund to meet your long-term financial goals

The strategies adopted for long-term investment are different from those for fulfilling short-term goals. A few asset classes may generate higher risk-adjusted returns over extended time frames compared to other classes that may perform well over the short term. Long-term investment horizons also allow you to take assume risks because long periods may allow your investments to recover from losses. By contrast, with a short-term investment horizon, there is a higher emphasis on income certainty and capital preservation.

One investment product that is favorable for long-term investment is equity mutual funds. This is because equity as an asset class has the potential to generate wealth, helping tide over inflation over the long term.

Important tips for fulfilling long-term goals through mutual funds

1. Align your investments with financial goals

Every long-term investment in an equity mutual fund must be attached to a financial goal. Doing so allows you to clearly estimate the corpus required for your goals and the time required to build this corpus. A long-term goal with a defined horizon allows you to figure out the monthly investment required to build your corpus, plan a good asset allocation strategy, and select appropriate securities. With these such details, you can identify your preferred equity fund scheme and fulfill your long-term goals within the estimated time frame.

2. Begin investing early

Beginning with your investments early through Systematic Investment Plans (SIPs) infuses financial discipline and helps you to benefit from compounding and rupee-cost averaging. Owing to compounding, the profits generated by your investment start to accrue returns of their own, thus yielding a larger corpus over a long time period with smaller investment contributions.

3. Assess investment strategies and objectives of funds

All mutual funds have clear investment strategies and objectives, which help you understand their asset allocation and fund management styles. Understanding the investment strategies and objectives of equity funds before investing in them may help you understand whether such investments would be aligned with your life goals, investment philosophy, risk tolerance, and investment horizon. You can get to know about a fund through its key investment memorandum, product leaflets, scheme information document, product presentation, and other investment literature.

4. Review the mutual fund’s past performance

It is important to compare the performance of a chosen fund against its benchmark index and peer funds over several time frames, such as one year, three years, five years, seven years, and ten years. While the past performance does not assure the same performance in future, doing so may help you understand how the fund has performed across diverse economic conditions and market movements in the past compared to the benchmark index and peer funds. These details could help you understand the potential of the equity mutual fund.

5. Consider the mutual fund’s expense ratio

Expense ratio is the unit cost for managing a mutual fund. Expense ratio is computed by dividing the annual operating expenditure of a fund by its daily net assets. The operating expenditures of mutual funds include advisory and management fees, commissions paid to distributors, registrar and transfer agent charges, legal and audit charges, selling and marketing expenses, and fund administration expenses. Because these expenses are funded by the assets under management of a mutual fund, a lower expense ratio means that a higher amount of money is being invested in the scheme for future growth and compounding.

6. Assess the reputation of the mutual fund house

While many investors tend to focus on fund managers and their experience when assessing a fund’s potential, the fund house, as well as the fund’s investment strategies and philosophies, play significant roles in determining the fund’s future performance. Good fund houses emphasize on the development of good organizational processes and management teams instead of depending on specific fund managers. This means, even if any star-performing fund manager leaves the mutual fund house in search of better opportunities, the sound organizational procedures of the fund house would ensure that the fund’s performance is sustained in the future.

End note

Besides following the abovementioned tips to reach your long-term financial goals, you would do well to periodically review the performance of the fund in which you are invested. This is because even outperforming funds may become underperformers. For this reason, if you are looking to fulfill your goals in time, you must assess the performance of your equity fund investments relative to those of peer funds and benchmark indices. If your fund investments have underperformed over the past one to two years, you could consider liquidating them and investing the proceeds in better-performing mutual funds.

Source: Axismf Research

Note: Views and opinions contained herein are for information purposes only and should not be construed as investment advice/ recommendation to any party or solicitation to buy, sale or hold any security or to adopt any investment strategy. It does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The recipient should exercise due caution and/ or seek professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein.

Statutory Disclaimer: Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd. (liability restricted to Rs. 1 Lakh). Trustee: Axis Mutual Fund Trustee Ltd. Investment Manager: Axis Asset Management Co. Ltd. (the AMC). Risk Factors: Axis Bank Limited is not liable or responsible for any loss or shortfall resulting from the operation of the scheme. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.

Past performance may or may not be sustained in future.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.