Mutual fund investments are widely considered a necessary tool for building a well-rounded investment portfolio. However, just like the broader financial services market, there is no one-size-fits-all mutual fund product. Therefore, you need to ask the right questions to determine what works best for your needs. Think of the MF market like a dinner buffet, with offerings ranging from highly safe debt funds to highly risk-oriented funds and everything in between. If your goal is to eat healthy, you would go for the salads, right? And if you’re okay with a few extra calories, you’d make a beeline for the gulab jamun. Similarly, once you know what the different kinds of mutual funds are like in terms of their features, risk profiles, and benefits, you’ll have a better idea of how they fit your specific requirements.
Hence, here are some questions you should ask your mutual fund distributor/financial advisor.
What is the fund’s objective?
Each mutual fund is set up with a certain objective in mind. It could be to focus on a particular market (such as equity or debt), a sector (such as banking or real estate), a basket of stocks across sectors, a certain geography (emerging or developed markets), or even in other funds (fund of funds). This guiding objective will influence how the fund house spends, manages and grows its investors’ money.
Asking about the fund objective or theme helps you understand how and where your money is going to be allocated..
How has it performed against the benchmark index?
In school, we all knew that Guptaji ka beta or Sharmaji ki beti, whose scores were the benchmark against which our own report cards were judged. Well, whether or not that was right, there is a similar example in mutual funds. Each fund is typically benchmarked to a market index, such as the BSE Sensex, NIFTY 50, S&P CNX 500, etc. In the long term, if a fund does better than its benchmark index, that’s good news. If it delivers the same or lower returns than the benchmark, it is not-so-good news.
Knowing the one, three, five and ten-year returns against the benchmark will help you take a decision on whether the fund is worth investing in. However, one must also keep in mind that past performance is never an indicator of future returns.