Don’t Select Funds In Haste

Seeing how mutual funds are finding their rightful place in investors’ portfolios is heartening. One of the hallmarks of the mutual fund industry’s growth in India has been its ability to offer a variety of funds to suit the needs of investors with varied risk profiles and investment goals. However, to get the best out of a mutual fund portfolio, you must select the right funds and in the right proportion, considering your risk profile, investment goals, time horizon and suitability of the product. However, this is an area, where many investors err by following a haphazard approach and that either results in disappointment or takes them beyond their risk-taking capacity. [EasyDNNnews:PaidContentStart]

Remember, when you follow a conservative approach, you will struggle to beat inflation and when you make aggressive choices, the volatility could compel you to abandon your allocation to equity and equity-related funds. Therefore, the focus should always be on the portfolio composition of the schemes i.e. the quality of the portfolio as well as exposure to different market segments such as Large-Cap, Mid-Cap and Small-Cap since that influences the level of fall and rise in the net asset value (NAV). As is evident, the selection of funds has a significant role to play in the kind of returns you can expect from your portfolio over time. 

Remember, different types of funds react differently in a rising as well as a falling market because different segments of the markets react that way. For example, generally, a mid-cap fund suffers more than a large-cap fund in a falling market. Therefore, your exposure to different market capitalisations should be in line with your risk profile. However, there cannot be a standard combination applicable to all kinds of investors. While deciding on the allocation, you have to keep in mind the composition of the entire portfolio. 

For a new investor, the right way to begin would be to consider funds that usually have a bias towards large caps. The exposure to mid-caps and small-caps can be enhanced over a period of time. If you are one of the investors who thinks that a simple way to invest in mutual funds is to just keep investing in funds that have a higher rating or ranking, think again. First of all, you must know that more than ratings or rankings, the methodology adopted to decide these is more relevant. A rating firm generally elaborates on the criteria for deciding the winners i.e. consistent performance, risk-adjusted returns, total returns and protection of capital. 

Remember, you will struggle to beat inflation when you follow a conservative approach. When you make aggressive choices, the volatility could compel you to abandon your allocation to equity and equity-related funds. 

Each of these factors is very important and has significance for different categories of funds. Besides, each of these factors has a varying degree of significance for different kinds of investors too. For example, consistency in returns comes from proper risk management. If you are afraid of negative returns, consistency will be a more important measure for you than the total return. A fund can have a very impressive total return over time but can be very volatile and test your patience and perseverance. 

Therefore, your process of fund selection typically should begin with establishing personal goals and objectives. As an investor, you need to decide your asset allocation based on your time horizon and focus on short-listing funds that have the potential to offer you the best from the chosen asset class. Most of the time, you would need just a few funds, carefully picked, watched and managed over some time. If you have doubts about your ability to do this on your own, take the help of a professional. However, taking help from a professional doesn’t undermine your own role in this entire process.

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