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Prudent Corporate

29 Nov 2024

How to Choose the Right Mutual Fund Scheme for Your Client

Investing in mutual funds which best suit the goals, risk level and time horizon is tough. As a mutual fund distributor, it's important to help your clients choose the right investment scheme. With a systematic approach, you can help them build the right mutual fund portfolio. In this article, we'll discuss some things you must remember when discussing mutual funds with your clients.  Factors to consider are as follows: 1. Client’s Investment Goals Before thinking about the mutual fund scheme choices, it is important to understand the reasons why your client wants to invest.  Are they saving for retirement, their kid’s education or simply for investment purposes? It is possible to make better recommendations if you know their investment objectives.  2. Assess Risk Tolerance Before proposing any scheme, you need to take into account the risk tolerance of each investor.  For example, some investors might be comfortable taking higher risks to achieve their goals while others might have a conservative attitude towards risk.  It is important to ascertain the risk that they can take with their investments.  If they need to take higher risks to achieve their life goals within a certain time frame, then you might have to work on making them understand the need to take slightly more risk with their investments.   Explain the different types of mutual funds and their risks and benefits. By this, you can recommend the mutual funds that best suit them.  3. Determine the Investment Time Horizon The length of time your client is willing to stay invested is another key factor. If they plan to invest for five years or more, equity funds may suit them as they offer better long-term growth.  However, for shorter durations, debt funds or hybrid funds may be more appropriate. Aligning the investment goals with the right time frame ensures that your client will be able to fulfill their goals in a timely manner.  4. Diversify Portfolio Sometimes an investor finds it hard to understand a diversified portfolio and how it works. Start by explaining concepts such as a mutual fund portfolio and diversification.  Explain to them that typically a well-diversified portfolio of mutual funds will include equity funds, debt funds and hybrid funds depending on what the client is seeking and the risk appetite.  It is always a good idea to diversify as investment options generally go through cycles of high and poor performance and the poor performance of one asset class might be balanced with other asset classes. This helps to optimize returns. 5. Review the Fund’s Performance The past performance does not guarantee the same or better performance in the future, but it lets you know how the fund has weathered the various business cycles.  One can recommend the fund if it has consistently outperformed the benchmark and its peers especially when the markets were down.  6. Assess the skill of the Fund Manager Usually, the effective results of the mutual funds rely on the people who run them. The chances are higher that a fund manager who has experience will take charge of the fund’s growth. Gather enough information regarding the fund manager’s strategy and style. Are they responsible for fund management directly or in a non-operational manner? Do they consistently beat benchmarks? Keep an eye on the fund manager's past performance.  Check the fund manager's performance against its benchmark. A fund manager who consistently outperforms the benchmark might be a good choice. If not, you may want to look for a different fund. 7. Analyze Expense Ratios Every mutual fund has a fee which is called expense ratio. Considering them when recommending a scheme is important since they're deducted from the fund's overall return.  For example, there are two funds in the same category and both of them have generated the same returns before consideration of the expense ratio. If Fund A has a higher expense ratio than Fund B, then Fund B will be deemed as the better fund than Fund A.  8. Planning for Taxes Taxes can affect mutual fund returns. For clients looking to invest in tax saving options, you might recommend Equity Linked Savings Schemes (ELSS) that offer tax deductions under Section 80C.  9. Exit Load and Lock-in Exit load is when your client redeems their investment before a certain period. ELSS funds, for instance, have a mandatory lock-in period, while others penalize early withdrawals.  Consider funds with low exit loads if your client needs liquidity. By doing this, they make sure their investments match both their investment goals and their cash flow needs. 10. Client’s Ethical Preferences Some clients might want to invest in ESG (Environmental, Social, and Governance) funds. These funds invest in ethical, sustainable companies. When you understand your clients' ethical preferences, you can recommend funds that not only meet their financial goals but also match their values, so they feel more confident. 11. Rebalance the Portfolio Periodically Mutual fund distributors don't stop after helping clients build the perfect portfolio. Your client's goals change too, as do market conditions. Ensure their portfolio is aligned with their investment goals by reviewing and rebalancing it regularly.  If their equity allocation has become higher than their original asset allocation requirement, you might suggest selling some units or investing more in debt and other asset classes.  Conclusion By emphasizing these 11 factors, you will be able to provide appropriate and comprehensive guidance to your clients and help them attain their financial objectives through mutual funds.  Each client is different, and appropriate investments can be made considering their unique situation. Distributors partnered with Prudent Corporate get access to the Prudent Partner Desk. It is an online platform and acts as a virtual office designed exclusively for registered Mutual Fund Distributors (MFDs), offering end-to-end support across various processes.  From client acquisition to seamless client servicing, it provides tools and resources to assist MFDs in scaling up their business efficiently, ensuring comprehensive support for growth and success. MFDs can use this information to provide their clients with the best investment solutions.  This would help foster trust and loyalty among your clients, creating a long-term profitable business relationship. Also, if you're new to the mutual fund industry, check out articles like How to Become a Mutual Fund Distributor in India. In addition, check out How to pass the NISM V-A exam. Start your distribution business journey today! with Prudent Corporate.