Having trouble choosing the right mutual fund? Here’s how the POWER framework can help you!

Over the years, mutual funds have become a preferred choice for long-term investments. Despite a growing awareness of mutual funds and their long-term wealth creation, investors still struggle to understand its full potential. Additionally, few potential investors are able to choose the right mutual fund for their specific needs. By adopting the goals-based investing strategy, you will be able to target the mutual fund that will help you achieve your goals. There is a wide range of mutual funds that offer solutions for various investment mandates and risk appetites.

For example: Rahul, who is in his early twenties, has set a long term wealth building financial goal and intends to have INR 2 crore in two decades to ensure he can buy the house of his dreams for his parents. He decided to start a SIP in small cap mutual funds to achieve his goal. But he does not know in which small cap fund to invest! How will he plan for the future? Well, we have a solution!

In order to ensure that the performance of your investments aligns with that of your risk-taking capacities and your financial objectives, the selection of the funds in your basket of mutual funds will play a crucial role.

The POWER framework envisioned by Nippon India Mutual Fund can help you wisely navigate the vast array of choices in your mutual fund investing exercise.

Here’s a breakdown of the POWER framework you can use to maintain the right mix of mutual funds in your portfolio:

Purchase order: This is the performance of the benchmark index. When selecting a mutual fund scheme, it is imperative to check whether the performance of the scheme is better than the benchmark. Active mutual fund plans have a benchmark that fund managers aim to outperform and any plan that consistently outperforms the benchmark may be a prudent choice. This indicates that the fund is in the hands of capable managers who have ensured that the fund’s performance remains on track. However, keep in mind that trends in past performance may or may not manifest in the future.

W: The second metric that investors can consider when using the POWER framework is whether a fund has a large investor base. A fund that has a large number of investors points out that many investors have been willing to trust the fund and its managers and have therefore been able to place their money in it with confidence. While a fund’s popularity cannot be considered a sure marker of fund performance or whether it’s right for you, it’s certainly an encouraging sign to see a fund have an established follower base.

E: This is an experiment covering different market cycles. This is one of the most crucial determinants in an investor’s mutual fund investing game. This metric helps investors assess the total number of years a fund has been in existence and how it has performed during different phases of market cycles. A rigorous amount of analysis and research goes into the stock selection process for a mutual fund plan and it depends on the experience and expertise of the mutual fund managers. The credibility of the asset management company also comes into play here.

R: These are good-sized assets under management. This is important for investors to consider as mutual funds that have colossal AUM (assets under management) numbers can pose challenges in terms of generating alpha. On the other hand, mutual funds that have very small AUMs may also not be the best bet for investors.

To read the original article, click here

Thus, the parameters of the POWER framework can help you simplify the process of selecting mutual funds. A successful investing track record is not only a function of discipline and diligence, but it also involves an awareness of the dynamics of the mutual fund arena.

Catch all the trade news, market news, breaking news and latest updates on Live Mint. Download the Mint News app to get daily market updates.

More less

To subscribe to Mint Bulletins

* Enter a valid email

* Thank you for subscribing to our newsletter.

Dolores W. Simon