Look Beyond Performance While Selecting Funds

"Consistency, both in terms of investment philosophy and investment strategy, should be the key parameters while selecting funds."

Hemant Rustagi Chief Executive Officer, Wiseinvest Pvt Ltd.

Analysing past performance is one of the key factors in your fund selection process. However, the focus should be on long-term performance rather than short-term movements in the net asset values (NAVs). If you are one of those investors who rely too much on shortterm performance for making an investment decision, there is a need to rethink your strategy. It is a proven fact that different segments of the stock market behave differently over different periods of time. Therefore, at times, you might find some aggressive funds like Small-Cap, Mid-Cap, sector or thematic funds dominating the list of the top-performing funds.

Investing in these, at that time, would make your portfolio too aggressive. As a result, you could end up taking more risk than you are financially or psychologically capable of. Similarly, the performance of a fund that has a proven long-term track record may get negatively impacted for a few quarters due to some of the sectors or stocks in the portfolio not finding favour, while retaining their long-term potential. Therefore, judging the potential of a fund based on its recent underperformance could keep you away from a quality fund.
 

Remember, a performance analysis of equity and equityoriented funds during the periods of market downturns would project a disappointing picture. If you were to consider the performance during these periods, you would find it difficult to make any significant allocation to equities. Hence, you must look beyond short-term performance to make a rational choice. Another example of why not to rely on short-term performance is the current situation for investors looking to invest in Debt Funds. If one were to look at the past one year performance of debt funds, it will be difficult to allocate money to these funds.
 

However, in reality, considering that we are almost at the peak of the interest rate cycle, there are options like target maturity funds that allow investors to lock in their investments at the current yields. The key question, therefore, is which other factors one must consider in addition to past performance. It is important to follow your asset allocation rather than picking the ‘flavour of the month’ funds. Within an asset class, look to invest in funds that provides the right level of diversification in the portfolio. In other words, suitability should be the most important factor in the selection process.
 

Considering that equity is an aggressive asset class, try not to make your portfolio very aggressive by investing in sector and thematic funds. Remember, if you choose a fund that has a proven track record, invariably the fund manager would have decent exposure to sectors and themes that are likely to do well going forward. Consistency, both in terms of investment philosophy and investment strategy, should be the key parameters while selecting funds. Imagine if the portfolio looks different every few quarters. It will then be very difficult for you to make a decision whether to continue with it or not. At times, the size of the fund can be an important factor that needs consideration.
 

For example, a fund with a very small corpus or large corpus can be a disadvantage for certain types of funds. Another factor that requires attention is time diversification i.e. remaining invested over different market cycles. It helps in mitigating the risks you might encounter while entering or exiting a particular investment or category at a bad time in the economic cycle. Remember, longer time periods smooth these fluctuations. In fact, time diversification is also important for the debt portfolio. You need to have a personal yardstick, which you may better with investment in a debt or debt-oriented fund. This may, for example, be the returns you have been getting from some of the traditional investment options like deposits, bonds and small savings schemes. To achieve this, the key is to manage credit and duration risk.