How to Evaluate and Select Mutual Funds for Portfolio Diversification in 2023

Feb 13th 2024
Mutual Fund
How to Evaluate and Select Mutual Funds for Portfolio Diversification in 2023

In recent years, mutual funds have been emerged as the most sought-after investment avenue for Indians. Set aside the high returns on investment, the ease and transparency that come with mutual funds investment make it a winning choice for today’s population. However, despite this, it is necessary for an investor to choose the right mutual fund to get the desired outcome. With a plethora of mutual fund houses available today, sometimes it becomes difficult to make the right choice. 

So, whether you have been already invest in mutual funds and want to diversify and expand your portfolio or you want to make fresh investment to mutual funds, here, we will gives a few valuable suggestions or tips on how to choose the best mutual funds in India in 2023 for investment. 

1. Determine Your Investment Objectives

Having a clear goal or objective in mind is the first step towards choosing the most appropriate mutual fund for your investment. Basically, there are two types of investment objective – short-term and long-term. Long term objectives can be children’s education, buying a house, retirement etc. On the other hand, short-term objectives can be buying a car, doing home renovation etc. If you want expand your mutual fund portfolio with a purpose of increase income, it is recommended to choose income-based funds like debt funds. Otherwise, if you have plans to create wealth over a period of time, going with equity-oriented funds would be a wonderful idea.

Most importantly, keep in mind that your investment objectives may alter from time to time, and this asks for the change of the investment approach accordingly. Ideally, one should assess his investment goals at regular intervals and take necessary actions to accommodate the goals in his mutual fund portfolio.

Above all, you should also take into account your risk bearing capacity while invest in mutual funds. Choose mutual funds that go along with your risk profile and gel perfectly with your investment goals. In case of a lower low-risk tolerance, choosing debt funds may be better in comparison to equity funds.

2. Check The Fund’s Portfolio

The next crucial factor to think while choosing mutual funds for portfolio diversification is composition. Don’t forget to inspect the portfolio properties and evaluate the fund’s asset distribution policy. Ideally, the mutual fund should invest in a prolonged portfolio to minimise the risks associated with particular domains or stocks.

Addition, take into account the overall performance of the portfolio constituents. Look for stocks with solid fundaments are they are widely preferred over inferior-quality stocks. 

Nevertheless, check the concentration danger linked with the fund's portfolio properties. Funds with extreme concentration risk may not be a wise choice for all investors, particularly those with a low-risk acceptance.

3. Evaluate The Fund’s Historical Performance

Prior to choosing a mutual fund, check a fund’s historical performance. Look at the elements like the fund’s overall returns over past few years and make a comparison of the same with its benchmark and other likewise funds. Though historical past performance is not a sure shot of getting desired returns, the purpose of this practice is to get an idea of the fund manager's investment plan and how it worked in the past. 

Don’t overall the consistency of the fund’s recital over diverse market cycles. Funds that have given dependable returns over a period of time are generally better than those that have altered widely. It is also crucial to comprehend that the fund’s performance should be checked in regard to the ongoing market scenarios.

One important thing not to forget is to check the fund’s volatility while judging its historical performance. Funds having high volatility aren’t appropriate for all investors, especially those with a low-risk bearing capacity.

4. Verify The Fund Manager’s Expertise

The role of a mutual fund manager is important in regard to its performance. Therefore, it is necessary to check the fund manager's experience and past record. Try to find out more about fund manager's investment approach and check his experience in the relevant domain.

Also, check the constancy of the fund manager's tenancy. Funds with infrequent variations in their managers are not good than those with a steady fund management expert.

In addition, experts recommend to evaluate the fund manager's aptitude in handling the fund's belonging under varying market scenarios. Fund managers with a proven track record of managing the fund's assets in various market conditions are generally preferred over those with limited experience.

5. Evaluate The Risk Profile

Mutual funds usually carry different levels of risk. This is why it is recommended to check the risk profile of the mutual fund to understand the underlying investment risks. High-risk funds like small-cap or mid-cap funds, may provide better returns, but they are extremely risky and volatile in nature.

Aside from this, check the fund's risk management approach. Funds having a steadfast risk management capability are always better than those with a feeble risk management structure.

Last but not least, evaluate the fund's introduction to precise stocks or sectors. Funds with high exposure to definite domains or stocks are not considered good for all investors, expressly those with a low-risk forbearance.

The Conclusion

If you are looking to diversify your mutual fund portfolio by investing in new mutual funds, it is better to consult a leading investment consulting company like Investkraft that can help you fulfil your investment objectives quickly, safely, and effectively. Give us a call today and let our mutual fund experts find the most suitable mutual funds for to you.


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