The new rules of the game

Have a good mix of mutual fund schemes that will provide aggressive growth and risk containment at the same time. For an average investor to pick up more than eight schemes means that he has not done adequate homework.

Prasunjit Mukherjee
Prasunjit Mukherjee, CEO, Plexus Management

The stack of mutual fund schemes in the market was perceived as a bagful of goodies that would suit every palate. However, the market downturn in recent times has shown that this is not the case. The fact is that a mutual fund scheme will suit you only if you are tailored to take the risks associated with it. While returns are a good indicator of the fund’s performance, generating returns is not the only attribute that can be used to assess the worthiness of a mutual fund scheme.

Just like a child acquires his parents’ traits as he grows up, so does a mutual fund take after its fund manager. Risky and aggressive, if you favour those like Sandeep Sabharwal’s JM schemes, or more middle-ofthe-road like the Prashant Jain-run HDFC schemes. It would be foolhardy to believe that a scheme will always be a top performer and keep on generating top-of-thecategory returns at all times. It would be even more untenable to harbour hopes of identifying only such successful schemes and having them in your portfolio without any duds.

When you create a portfolio of equity mutual fund schemes, you obviously want it to be loaded only with super-performers. Since this is extremely unlikely to happen, it would make sense to structure the portfolio. Have a good mix of funds that can provide aggressive growth and risk containment at the same time. Obviously, the first step is to decide on the number of schemes. Remember, that a mutual fund is not equity, but a basket of equity scrips. So don’t buy any and all kinds of schemes. For an average investor to pick up more than eight schemes means that he has not done adequate homework.

What you must do is to evaluate you risk tolerance and investment characteristics as well as your investment goals. You don’t necessarily need a psychoanalyst for doing this. Just ask yourself some basic questions and reply to them as sincerely as possible. How much growth are you looking at? Within what period, and failing to reach the desired number, how much loss are you willing to bear and for how long? If you are overly inclined to take high stakes, then the schemes that have been aggressively managed should form a bulk of your portfolio.

What qualifies as a successful, aggressive orientation is relatively high positive alpha generation, the yardstick by which the fund beats its benchmark. This basically indicates that the fund is taking the right bets, and given a certain degree of risk, it is over compensating by providing a higher return. But make sure that the alphas are not for too long a period (a maximum of one year). This is important because a certain spike in the alpha in the distant past could hide blemishes in the recent past. Analysing the risks in equity funds is slightly tricky, but volatility tracking is the best option if you do not have a competent and aware personal finance adviser.

Finally, choose schemes that you would be comfortable with over a period of time. Don’t indulge in momentum tracking, where you have only those schemes that seem similar and perform in a similar manner. The latter will give you extreme periods of boom and doom. Above all, look at how the fund fits into your financial plan, the risk and costs associated with the fund and its return potential before you invest in it. This homework should ensure satisfactory results.