Everybody wants to know which mutual fund schemes to buy to get maximize and peaceful returns. Though most of the investors are happy with their existing holdings of mutual funds schemes; they churn their portfolio with deceptive return in thin margins, are shockingly disappointed to see their mutual fund investments have backed fire their money sinking. In fact, they follow half-backed strategies and could not see hidden risks in them. This article is writing about some features which you do not need to focus on them. But before that, let me reiterate what I have always said several times earlier that the money you invest in equity mutual funds should be the money you can afford for at least 10, if not 20, years. Ideally this is money that you plan to achieve some of the fundamental financial goals for your children and your retirement in the form of mutual funds portfolio. Like appropriate asset allocation, effective diversification and suitable fund selections, what to avoid is also equally important for every savvy investor who desires in a mutual fund portfolio. Here is the analysis of some common features, which investors should overlook to select the fund.
The past performance of any fund is a vital part in analyzing a mutual fund schemes. But, remember the quote in tiny fonts in every mutual fund schemes entails “Past performance may or may not be sustained in future”. It does not mean that you should not check their past performance, how long is the past that you should check? There are plethora funds which have performed for 3-6 months but failed later in turmoil period. You should ideally be checking at least on 3 year, 5 year and 10 year performances of the fund rather than for3- 6 months and 1 year. It would indicate the fund’s ability to clock returns across various market cycles especially during the downturn and interest rates. And, if the fund has a well-established track record, the likelihood of it performing well in the future is higher than a fund which has not performed well. During a rally it is easy for a fund to deliver above-average returns; but the true test of its performance is when it posts higher returns than its benchmark and peers during the downturn. Giving time for performance of the fund is very essential especially for equity funds which usually fail in short term but have potential to perform in the long term.
Fund Management Fee
Like ULIP, mutual fund management charges also fee in the form of expense ratio and exit load for the managing the fund. Expense ratio is the percentage of assets usual range to the tune of 0.5-2.5 percent that used for paying management fees, commissions, advertising expenses and other costs that the fund incurs in the process of investing. If two funds are similar in all parameters it might not be worth buying mutual fund scheme which has a high costs associated with it, only for a marginally better performance than the other. But, it doesn’t mean that all funds which deliver lesser expense ratio deliver great returns and funds which charge higher ratio have performed poorly. For funds which give you higher returns, it may not matter much.
Size of Fund
Though there is no definite relationship between the size of a fund and its performance, it is believed that both, being too large and too small, can hinder a fund’s performance. Hence, it is usually recommended that prudent investors should put their money in a fund that is neither too small nor too big in size; it should go for the one whose assets under management (AUM) are approximately the same as the category average. This will ensure that the fund is neither over-diversified nor too concentrated. A large fund has some obvious cost benefits. As a fund grows bigger, the fixed costs relating to the fund become a smaller proportion of the expenses, which improves the efficiency of the fund. But in certain cases, size could be an obstacle as fund could affect its performance specifically holds true for mid-cap funds. This is because large scale buying or selling by the fund can lead to a massive impact on the price of mid-cap stocks.
Not to follow Fund Managers
The performance of the fund depends upon the fund management process followed by the fund house. Strong investment processes and systems are the key in determining the consistency of a fund’s performance in the future whether the fund manager currently managing the fund is there or not. Moreover, as a litmus test you also need to ascertain how the respective mutual fund schemes managed by the star fund manager has sailed during various market cycles i.e. during bull and bear phases. The true test of the fund manager lies during the bear phase. Instead of relying heavily on an individual’s fund management trait, it is vital that you give due weightage to the investment processes and systems followed by the fund house. This in turn will help you to reduce the downside risk as investments made for the portfolio are process driven, whereby the investment mandates too are followed by the fund houses and the fund manager’s role is to function within the parameters defined by the fund house.
Remember, your fund manager has no magic wand. And even if he does, over-dependency would not be the right approach. Thus, getting the fund house which follows strong investment processes and systems is the first, right and very important step in making a prudent investment decision in mutual fund investing.
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