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How do I pick a long-term mutual fund?

EquityEdge

November 22, 2024

Can you provide me with a checklist to follow while selecting a mutual fund for the long term? I don’t want to rely solely on past performance. – Anonymous

Relying exclusively on previous success might be deceptive because it only helps those who invested before that performance occurred. If a mutual fund returned 100%, it is only beneficial to those who invested before the gain. For others, prior performance is only an indicator and does not guarantee future results.

The actual importance of prior performance is in understanding how the fund performed in both rising and declining markets, as well as how quickly it recovered from downturns. Some funds may take a long time to recover, while others return quickly owing to their underlying qualities. Instead than expecting past results to reoccur, concentrate on these resilient characteristics.

Here’s an important checklist to consider:

Compare the fund’s performance to peers.
Evaluate the fund’s long- and medium-term performance in comparison to other alternatives in the same category. Short-term performance (less than one year for equity funds) is often ineffective.

Look for steady returns throughout time.
Long-term returns are determined by a fund’s capacity to climb slightly more in up markets while falling slightly less in down markets. A fund that cannot maintain this balance may provide unsatisfactory outcomes.

Examine the track record of the fund management.
In management, consistency is essential. Check to see if the same manager’s approach is responsible for the fund’s performance. It can be a warning sign if the manager has departed.

Even if these elements are significant, your individual investing habits have a bigger influence on long-term profits. Your outcomes will eventually improve if you stick to your investing plan, don’t panic when the market is declining, and keep making regular investments even when the market is declining.

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