Thanks to some great marketing campaigns and real ground work by mutual fund companies, mutual funds have gained mass acceptance among the young investors. We can comfortably say Mutual Fund, Sahi Hai!
This positive change has brought along with it another problem. The problem of plenty. With over two thousand five hundred
mutual fund schemes in the market and nine hundred of them being equity-based, it is definitely a tough ask for anyone to decide on the scheme most suitable for him/her. This is akin to choosing between rasgulla and carrot halwa at the end of the lavish buffet that you just gorged upon!! Difficult? Indeed!
While there is no ‘one size fits all’ approach, you can definitely follow a few thumb rules to narrow down your selection. In this post, I will tell you how to choose an equity mutual fund and in my next post, I will cover debt funds too.
Here are the six things to remember.
Consistent and proven track record:
First and foremost check whether the mutual fund scheme has been a consistent performer over a relatively long period of time. As a thumb rule, ignore any scheme which is less than three years old. It is a myth that new schemes are ‘cheap’. An unknown cricket player might be a great buy in an IPL auction if he performs well. But when it comes to mutual funds, the performance is dependent on the eventual stock selection which is more associated with pedigree of the fund management team. A relatively new scheme might do well, but during the same period there is no reason why an existing older scheme cannot match it.
Strong core portfolio:
Your investments are just like a construction of a house. You always ensure that the foundation is strong. A core portfolio is as essential as this strong foundation. This portfolio should contain two to three diversified equity mutual fund schemes. These funds should ideally have a track record of atleast seven to ten years. These funds provide the needed stability to your investments and thus should not be tinkered with at any point of time.
No NFO (New Fund Offer):
NEVER invest in a New Fund. There is hardly anything left in the Indian equity space that has not been offered earlier. NFO is just another way of luring investors by highlighting the so-called ‘new themes’. Be it ‘housing opportunities’ or ‘Resurgent India’ – there is neither a new opportunity nor any new resurgence India is seeing. So please stay away from these mutual fund schemes. Any new fund spends more on advertising and is allowed to charge more as expenses (including higher agent payouts). Needless to say, this expense is taken away from your investments and returns!
No Thematic or Sectoral Fund:
Do not invest in a scheme that invests specifically in any sector (say banking) or is based on a certain theme (say infrastructure). The problem with any sector or theme is that the outperformance is short-lived. This results in you having to monitor and make changes in your portfolio more often – both adding to your cost. Moreover, if any sector indeed looks promising in the short to medium term, the fund manager of existing schemes of yours would also invest a certain part of your money in that sector. You will anyways make your money without needing to invest in such sector specific schemes.
Do a quick assessment whether the scheme and you make a perfect match! I am talking about the risk that the schemes carry. Some schemes carry more risk by the nature of their investments and it would be unwise to invest just by looking at the returns that they have given in a certain ‘good’ period. A standard way of identifying funds is to visit Moneycontrol or Value Research Online and invest in the schemes that have generated the maximum returns over the last one year period. This is one of the worst ways of selecting a scheme. You can assess your risk level here before picking a scheme to invest.
I have come across many investors who have invested in 15 to 20 different schemes. The logic given by them is that ‘even if a few funds don’t perform well, I am safe’. This is again a folly. Ideally a portfolio should not have more than seven to eight schemes (including those where you have invested for tax saving purposes). Two to three diversified/large-cap schemes, two tax saving schemes, two to three schemes depending on your suitability (small/mid cap/balanced) and most of you are well covered. Anything more than this is not required. The portfolio with more than this is not optimum and also takes more time of yours.
I hope these six things will provide you with a sense of direction. Wish you all the best in picking the right funds. If you have any query specific to any fund that you want an opinion on or if you want to get your existing portfolio reviewed, please do contact us.
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