Basic parameters for investing in mutual fund

Most investors get carried away by what MF representative say or by the advertisements made by the mutual fund houses. Let’s find out some of the basic parameters that one must checkout before investing in mutual funds.

These days many people are more inclined towards investment in mutual funds and many of the online platforms and even mobile apps are offering easy access to mutual funds. This has given rise to DIY (Do-It-Yourself) culture in this space. Thus it is very important for the investors to how to select a mutual fund. Following are some of the basic parameters one must check before investing in a mutual fund.

Portfolio P/E ratio
Price-to-Earning ratio or abbreviated as P/E ratio, is simply how much you are paying to earn one rupee. Portfolio P/E ratio is aggregated price to earning ratio of all the stocks comprising in a fund. High portfolio P/E ratio indicates that people need to pay a higher price for the most of the stocks comprised in a portfolio and visa versa.

Portfolio P/B ratio
Price-to-Book Value ratio or abbreviated as P/B Ratio, is simply how much price you are paying for one unit of book value. Portfolio P/B Ratio is aggregated price to book value ratio of stocks comprising in a mutual fund.

Market cap
Whether the fund is invested in a large-cap, mid-cap or small-cap is shown by the market cap. Investment in large-cap shows that the mutual fund has invested in companies with large market capitalization. Market cap can help investors to somewhat judge the risk that a fund may be carrying. For instance, investment in a mutual fund which invests in large-cap companies may pose a lesser risk as compared to mutual funds investing in small-cap companies.

Expense ratio
Expense ratio is simply the operating cost that is incurred to run a mutual fund as a percentage of its asset under management. The expense ratio is calculated by dividing the operating expenses of a mutual fund with that of its asset under management value. As expense ratios are taken from the returns, it becomes important for an investor to check the mutual fund’s expense ratio.

Load structure
It's good to know that these days entry load in no more applicable for mutual funds. However, the exit load still exist. So, it is important to look at the exit load that a mutual fund comes with. Exit load is the charge levied on a customer who redeems units of a mutual fund before the predetermined time or number of units or both.