MF Query Board

I would like to invest in mutual funds since I have started with a new job. Could you please walk me through the fundamental stages to choosing a decent equity mutual fund?

- Saurabh Jumble[EasyDNNnews:PaidContentStart]

If you are considering investing in an equity mutual fund, it may be challenging for you to select one among the wide variety of funds available. Finding the one that will perform well in the future and provide returns that are superior to those of its competitors is always a tough task. However, if you adhere to a few fundamentals while selecting the fund, there’s a chance that you will obtain respectable returns on your money. Here are some crucial criteria for choosing a top mutual fund strategy:

Choosing the Right Fund — Effectively choosing an equity fund that meets your needs begins with a thorough evaluation of your individual risk tolerance and your financial objectives. Instead of being a bottom-up process, it is a top-down process. For instance, you might choose to establish a SIP as a moderate risk investor with a 15-year time horizon. In this situation, you want to look into your options in the diversified stock area. Similar to this, a risktaking investor would want to think about a fund that is more volatile and has the potential to provide a higher CAGR such as a Mid-Cap fund. 

Avoiding Mistakes — Many individual investors choose equity mutual fund strategies for incorrect reasons. For instance, we have observed several clients invest quickly in equity schemes based only on their one-year returns. Since short-term performance normally results from one or two alphagenerating stock decisions and does not typically extend into the long-term future, this more often than not backfires. Similar to the previous point, choosing an equity fund only based on its star rating as supplied by portals or issuers is not a foolproof way of fund selection. Another trap for retail investors to avoid is falling prey to media hype generated by cleverly designed advertising campaigns. 

Checklist — You now need to choose a fund from that category after deciding on it as your best fit. As a general guideline, choose a fund with a strong vintage and a track record of successfully navigating at least three market cycles. An investor should assess the fund management team’s response to volatile market periods, such as the 2008 global financial crisis. Examine whether the fund is ‘true to label’ or arbitrarily chases momentum plays. Compare its three, five, and 10-year returns against others in its category. And finally take a moment to evaluate the fund manager in charge. During your investment tenure it’s likely that he or she will have to maturely navigate through more than one bear market. Regardless of how attractive their academic credentials may seem, stay away from funds managed by ‘whiz youngsters’ with little experience. These three easy filters might assist you in making an informed decision. 

Company Background — The investor must also look into the promoters of the mutual fund company’s credentials. Established, reputable businesses have strong investment practises and policies that guarantee your money is safe and well-positioned to profit from market fluctuations. 

Portfolio or Fund Manager — One important thing to research is the fund manager’s track record and his or her prowess at effectively navigating market cycles over extended periods of time. 

Verify the fund’s capacity to adhere to the investment objective mandate. Avoid funds that frequently change their allocations or overarching theme. Many people fall victim to the blatant previous performance formula. There is always a wiser course of action, so it is essential to speak with your advisor or mutual fund distributor before making a choice. 

As an NRI investing through SIPs I have been investing in Axis Bluechip Fund, Axis Small-Cap Fund, Parag Parikh Flexi-Cap Fund and ICICI Prudential Nifty Mid-Cap 150 Index Fund for the past two years with a monthly investment of around `30,000. My goal is to create wealth for my child’s higher education in 18-20 years and to build a retirement corpus. Can you assess whether the funds are suitable or should I make changes to the portfolio?

- Jestine Augusthy

Without knowing your risk profile, it is impossible to evaluate your current mutual fund portfolio or recommend any specific schemes. It is important to have a target-based approach to ensure that your investments align with your goals. For instance, you can estimate the cost of your child’s higher education while taking inflation into account, and do the same for your retirement corpus by factoring in your current living expenses and annual inflation. Your current portfolio consists of a Large-Cap scheme, a small-cap scheme, a flexi-cap scheme and a mid-cap scheme. While three of these have a good track record, the mid-cap scheme is relatively new. Keep in mind that small-cap and mid-cap schemes are generally considered high-risk and volatile. If you are comfortable with this level of risk, you should first determine which international market you want to invest in, such as the US, Europe or China, among others. There are schemes available that invest in these markets.

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