There are many mutual funds available out there, but you need to decide on what is best for you as an investor. However, that decision is subjective. A fund which works for one investor might not necessarily work for the other. Building a mutual fund portfolio depends on several unique parameters to you, and the fund's performance significantly. How can we say what makes a particular fund the best? The answer depends on the following ways –
Helps achieve financial goals
If you find a fund which helps you accomplish your financial goals within a fixed time frame, you might be looking at a winning fund. For example, if your goal is to create a corpus for funding your children's education or wedding or retirement, you need a relatively less risky fund and offers decent returns. If you plan to buy a fancy vehicle in three years, on the other hand, you can opt for high-risk funds which provide higher returns.
Matches risk appetite
Some funds help you create large corpus within a short span like small-cap or mid-cap funds. But you might need to bear higher risk levels. If you are a risk-averse investor, then diversified large-cap funds and debt funds are the best options.
Fulfils your needs
Varied investors have varied needs. If you are a youngster, starting with the investment journey might build a corpus over time. As a young investor, you can afford to take higher risk for earning more returns. However, if you are a retired person, you might be looking to earn monthly income, and therefore want something stable and involves minimal risk. Factors such as age and risk appetite often come into picture while selecting the fund.
Besides these personal factors, there is a requirement of mutual fund portfolio analysis as well, which involve other factors like –
Fund performance
The fund performance provides an insight into how well it can perform in the future. You should look at how the fund you have singled out has performed against the others in the same category. For example, if you are considering large-cap funds, compare them with other large-cap funds. Check their performance during both bull and bear trends.
Fund management
The performance largely depends on how it gets managed, by whom, and for how long. The fund manager's role is essential for the performance as the manager is the ultimate decision-maker, deciding when to buy which shares and at what price. They are the backbone of building the mutual fund portfolio. Therefore, it is essential to know who manages the fund and look at others driving or managed before starting the investments.