Indians have the option of investing in more than 5,500 mutual fund schemes. These include 300 in the equity category alone. Within these, the person can choose exposure to different avenues such as debt, equity and gold. Then there are different investing styles that individual fund managers follow and which impact the returns their schemes give. That's why finding the right fund is not the easiest of jobs. We discuss a few pointers investors can use to select mutual fund schemes.
1. Investment objective
Usually, people invest with an objective. The time period to meet the aim may vary from a few months to years. For instance, saving for a downpayment for a car is a short-term goal. Working out finances for retirement and children's education and marriage is a long-term goal.
"Typically, we look at equity funds for long-term objectives and money market and debt funds for short-term goals. A lot depends upon the investor's risk appetite. Hence, approach your financial planner to identify your objectives and link them with your risk appetite. After this, find out about the funds- what type of fund it is (equity, debt, hybrid, money market) and how and where it will invest your money?" says Harshad Chetanwala, head, customer delight, Quantum Asset Management Company.
Anil Rego, chief executive officer, Right Horizons, says, "The objective clarifies the investor's risk appetite and, hence, lays the foundation for his portfolio. All investments should be made after assessing one's objective and risk profile."
But where can one look for this information? Key information document and scheme information document have all the details about the scheme, including its objective, strategy and where it will invest.
2. Know the fund house
When we invest in a fund, we give a mandate to the fund house to manage the money on our behalf. We expect the fund house to take due care of our investments. It is the decisions taken by the fund house that will take us close to our goals and secure our future. If the fund house fails in its objective, we will end up losing our money and, maybe, our faith in mutual funds as well.
"Knowing the fund house, hence, is very important. The key questions here are what is its investment approach, how many schemes it offers, does it offer same type of funds under different names or does it come up with products that make sense for investors? Plus, it is important to know how it invests and if it dependent upon a star fund manager's whims or follows a process. How easy it is to invest or redeem investment with the fund house is also an important factor," says Quantum's Chetanwala.
Some of this information is there in key information document and scheme information document. But it is imperative to question either the fund house or its representative on these points.
3. Fund performance
The ultimate goal is returns. Investors should look at returns given by the fund during different time periods and compare them with the benchmark, usually an index, and other funds in the same category. For equity mutual funds, check the long-term (three-five years) performance, while for debt funds look at returns over the short to medium term.
"An important yardstick can be "alpha". It shows returns over and above that given by the benchmark. A positive alpha is desirable and shows performance that is better than the benchmark," says Rego of Right Horizon.
Chetanwala of Quantum says investors must avoid funds whose returns are volatile. Look for consistency and long track record.
Where to look for this information: Fund fact sheets and websites like www.valueresearchonline.com and www.morningstar.in give information about the performance of funds.
4. Loads & recurring expenses
These small costs can have a big impact on returns in the long run. A difference of 0.50% in recurring cost over a long period of, say, 10 years can make a big difference. The recurring cost in mutual fund is the expense ratio.
Unfortunately, not many people look at the fund house's expense ratio before investing. Ideally, the bigger the size of fund, the lower is its recurring cost.
The other cost is the exit load, which is paid by the investor when he redeems the investment before a certain period. Different types of funds have different exit loads depending upon the nature of assets held by them.
A lot of us invest in mutual funds through SIP (systematic investment plan). At the time of redemption, 'first in first out' method is followed. This means units purchased first are liquidated first. This information can be found in key information document, scheme information document and fund fact sheets.
5. Research on fund manager
It is important to know the fund manager as well. One can do so by analysing the performance of funds managed by him, especially during periods when markets went through difficult times.
"If the fund manager has expertise over different investment categories and fund styles, it can be considered an advantage by investors, since it may help him design a portfolio that is efficient," says Rego.
6. Be disciplined
It is easy to start investing in mutual funds but difficult to keep the investments going. However, you can avoid this by adopting a more disciplined approach. For this, it is a must to resist the temptation of following the latest market trend. Jaideep Bhattacharya, managing director, Baroda Pioneer Asset Management Company, says, "Set up a schedule for adding units while being careful to keep cash for emergencies. Investing at regular intervals will reduce the risk of volatility. Consider SIPs."