Investing in a good mutual fund is the best and the easiest way to build a perfect portfolio. Money Today partners with Value Research to present a portfolio of features on fund to help you get started and get ahead. 

 Intelligent investing is intelligent no more. Or so it has seemed for the past few years. Because with mutual funds, zeroes all but find their own way into bank balances. Pack a few thousands in a “good” scheme and that’s it. Fund managers will trawl the investment space to churn your money best. The risk-reward balance ensures you sleep well most nights.

There’s more than investment woes to share in evening dos. More time spent with kids’ homework than poring over stock pages of pink dailies or news about interest rates. And with systematic investment plans (SIPs) you aren’t exactly scrimping your way to this zero-worry state.

Clearly, the no-personal-interference principle is working wonders for your money. Average funds gave double digit returns last year. So why read the next 60 pages on mutual funds? Why try and understand them better? Isn’t investing in funds intelligent enough?

No. Because it isn’t quite that simple. Most people could fine-tune their strategies on how and why to buy into mutual funds. A fine-tuning that could determine whether you earn 3.98% or 94.36 % on your mutual fund investments this year. That was the gap between and best and the worst performing equity-diversified fund scheme we analysed for the past one year. Fund investing isn’t also as simple as picking the best schemes based on past year’s records. Yesterday’s No. 1 can be tomorrow’s No. 10, or lower. There are over 700 funds to choose from for retail investors alone.

A thorough assessment must include comparison of risks, returns, fund portfolio, expense ratios…and what have you. Not to forget their suitability to your risk profile, goals and period of investment. If volatility unnerves you, what funds will give steady returns? Is there something for retired investors? Is a particular sector exposure too high?

This is not to say that mutual funds are not intelligent or not simple investments. Of course they are. That is what makes them so special. Compare buying funds to buying property or stocks. If you were to choose 10 scrips from 100 listed companies, there are 17X10^12 (approximately 17 followed by 12 zeros) possibilities. And there are over 5,000 stocks listed in the Indian stock markets. Imagine monitoring and sieving through reams of facts and rumours that each company generates on a daily basis!

Confused and intimidated already? Here’s where we come in. To inform and explain the exact dose of expertise required for becoming an intelligent fund investor. At the outset, let’s assure you it is not difficult. Don’t be intimidated by the size of this MONEY TODAY issue (thickest since our launch in October last year). The attempt is to cover the maximum base possible. In this section we analyse schemes that we consider to be the best performers across six select classes of mutual funds.

Ranking apart, there are detailed explanations on concepts and new trends in the mutual fund spectrum. This is followed by exhaustive data on all existing funds launched before the first week of July, especially formatted and simplified for readers’ convenience. Wrapping up the package is a primer for the un-initiated (works as revision for regular investors, too). A smattering of nine expert views on various aspects of fund investing puts things in perspective.

Whew. Let’s admit it; even we couldn’t get this done without expert help. Enter our specialists. Partners in this ambitious project, Value Research, is the premier source of information on the Indian mutual fund universe. By examining details of all fund performances and benchmarking them to riskfree returns (such as bank fixed deposits) as well as to market indices (every equity fund benchmarks itself to some market index) across different timeframes, Value Research’s proprietary model throws up a ranking that goes beyond evaluating nominal returns alone.

At the end of all this datamassaging, Value Research’s assigned risk rating should help you make a much more sophisticated judgement. If two schemes give similar returns, how do you know which one’s better? These rankings identify the one performing well at a consistently lower risk of loss and relatively lower cost.

We believe Value Research’s methods are robust. But like all statistical methods, they are more reliable in longer time periods with plenty of data observations. Hence, we have differentiated between schemes with more than three years track records and those with less. New launches are bandied around in the media and stick in investors’ mind and some in their portfolios too. Given readers’ repeated queries about them, we decided to look at the potential of some newer ones too.

But what if you’ve heard a hot tip about a fund not in our A list? Or want to check out data about an existing laggard in your portfolio? Presenting our exhaustive data tables in the Fund Ready Reckoner section. Trying to pre-empt the reader’s mind, we have included 14 key parameters for tracking fund performances in this section, again prepared with the help, debate and discussions with Value Research.

Is a fund aggressively growth-oriented in terms of stock selection? Is it more moderate? Does it have a high or low expense ratio? What sort of SIP commitment is required? If it is hybrid (balanced), what is the normal equity-debt mix? Has the fund manager been there long enough? Does the fund stick to its mandate in terms of allocation across sectors or is over-concentrated? All tools for a personal analysis are right here. If you do not understand basic terms like NAV (Net Asset Value), recognise a term or cannot understand the utility of a concept, check MT Basics.

Which brings us to the next question. You now know why this story is a must read. Also, what the following pages contain. Next in line, some navigating tips to make most of our package.

Put yourself in an imaginary (but very plausible) investment conundrums and wade through conceptual questions. Having answered these hard questions, examine the result. Your investment philosophy, strategy and priorities will get clearer from the answers.

This is where you zero in on your investor type, ideal asset mix and target corpus. Reminds you of financial planning? Exactly what it is. Don’t forget, mutual funds are but an instrument that have to be manipulated adroitly to put the larger picture in place. Now how do you go about investing in them?

If you want to make fresh investments, revert to the rankings listed and elaborated across these pages. In front of you are the best options available in the market. Then it is just a question of choosing the fund category (the quiz ought to have told you that).

While we have concentrated on equity funds in the rankings because that is the key component for most mutual fund portfolios, we certainly haven’t ignored other key fund categories in our line up of the top funds. And of course, we have covered every fund in the market in our Ready Reckoner.

First of all note that the balanced or hybrid category has the widest variation in terms of both risk and returns and also in terms of expense ratios. That’s because the equity:debt split can vary a lot from scheme to scheme and even year to year for the same scheme. If you’re clever about it, you can juggle balanced funds to get the debt:equity ratio you think you should hold.

If you need a tax-efficient portfolio, take a look at the best schemes in that space (Tax Planning, also called ELSS). This category is basically equity but the schemes have lock-ins to ensure that you don’t get hit by a massive tax outgo. Actually, all equity funds are reasonably tax-efficient because the capital gains rate itself is moderate but tax planning funds make it difficult for you to exit early. The effective returns from this category are very good but the other side of the coin is that these schemes are comparatively more expensive in expense ratios.

If you’re past middle-age and more interested in income than growth, you can check out MIPs. Be warned however that Value Research’s methodology suggests that MIP schemes are all inherently risky. On the other hand, floaters are among the safest and most conservative instruments in the debt universe. These schemes are immune to any possible reboots of the interest rate regime by the RBI. They deliver returns within a very narrow bandwidth of less than 1% variation. Here, the key to the best picks is the lowest expense ratios.

Many investors are comfortable spreading risk in one sector alone. For instance, a software engineer might feel more comfortable straddling IT exposure. Sector diversification is the best tool to leverage such an advantage. The most well-researched fund investment can fall flat if its tax implications are ignored. You might find lower than expected in-hand returns because tax deductions were not factored in.

Complicating matters further, different tax rates are applicable to different fund types. So a fixed maturity plan for three years attracts X% tax while returns from an equity-diversified scheme held for the same period have Y% tax. Finally, if you have savings or portfolio of about Rs 10 lakh, run through the story on personal management services (PMS) sort of custom-made mutual funds tailored to your profile and objectives. But don’t step into any of this if your concepts are weak. Newbies target the primer at the end. From the benefits of fund investing to the seven blunders of the fund world to the most common myths about fund investing, read the issue backwards! Even those encountering problems in other stories, hit the basics section for clarifications.

By the time you have waded through everything (and we admit there’s a lot of it), you should be very well equipped to manage your own mutual fund portfolio. It does seem like a lot of hard work. But think of it like this. It’s easier to become a specialist in picking the best money-management specialists than it is becoming a specialist at money management yourself. This is not a fast-paced thriller to more money. Take a few days to patiently read and assimilate the nuances. And then put the issue in your bookshelf. We’re sure you will want to refer back.