Follow The Right Process For Fund Selection Hemant Rustagi Chief Executive Officer, Wiseinvest Pvt Ltd.

Mutual funds have registered phenomenal growth in our country as they have an edge over other investment options in terms of flexibility, ease of investing, transparency— both in terms of where the money is invested and the costs involved—professional fund management and regulations governing their functioning. This growth has allowed Indian investors the flexibility of choosing the most appropriate funds to suit their needs, in line with their investment goals and time horizon. [EasyDNNnews:PaidContentStart]

However, the variety of funds on offer also causes dilemmas in the minds of investors as they have thousands of schemes to choose from. No wonder, investors often end up investing in funds that do not match their defined risk profile and goals. Besides, there are instances where investors build an unwieldy portfolio by investing in a large number of funds. That’s why, despite investing their monies through one of the most effective investment vehicles, they don’t get the desired results. 

Therefore, if you are a mutual fund investor, you must focus on making the right selection of funds to benefit from the real potential of this wonderful investment vehicle. The key issue, therefore, is how you should go about it. If you have been facing this dilemma, here's what you need to do: 

Start the process by ascertaining your asset allocation You must avoid making the mistake of investing haphazardly in any fund that comes your way. No doubt, past performance is one of the criteria in the selection process, relying too much on it and that too on a short-term trend, can either make your portfolio very aggressive or very conservative. Therefore, focus on asset allocation to begin with. Asset allocation allows you to decide how much of your money should be invested in different asset classes like debt, equity and gold. 

Remember, asset allocation also decides the level of risk in your portfolio and what to expect in terms of returns. Your time horizon for each of your goals can go a long way in deciding the right asset class. For example, while investing for long-term goals like retirement planning and building a corpus for children's education and marriage, equity has to be the mainstay as you need to generate a positive real rate of return i.e. gross return minus inflation and taxes. Similarly, while investing for the short term, safety of capital has to be given top priority and hence Debt Funds should dominate this part of the portfolio. A mix of equity and debt can be ideal for goals to be achieved over a time horizon of 3-5 years or so.Choose appropriate funds for each asset class Once you have worked out your asset allocation, the next step should be to choose the right funds that can get you the best from the chosen asset class. For example, while deciding funds for long-term goals, you need to consider pure equity or equity-oriented Hybrid Funds. There can always be a temptation of investing in aggressive funds like sector and thematic funds due to their impressive performance during certain periods. However, the key for long-term investment success is maintaining the right balance between risk and reward. 

This step itself restricts your investment universe instead of thousands of funds. Within that too, if you are relatively a new investor, you should be investing in well-diversified categories like flexi-cap, multi-cap and large & midcap. Out of these, you can eliminate those funds that have not been performing well consistently vis-a-vis their benchmarks and the peer group. 

Avoid investing too much money in a single fund house One often comes across portfolios wherein a significant part is invested in a single fund house. Needless to say, it's not a great idea as by doing so you may forfeit your chances of benefitting from the expertise of other fund managers and their investment philosophies. 

[EasyDNNnews:PaidContentEnd] [EasyDNNnews:UnPaidContentStart]

[EasyDNNnews:UnPaidContentEnd]