| A four-step guide to choosing your scheme | |
| Smart Investing | |
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With the total number of equity mutual fund schemes amounting to more than 500, it becomes a difficult choice for the lay investor to make a decision as to where to invest. What makes his decision even
more difficult is the fact that most of the equity funds have outperformed their benchmark in the recent past. In such a scenario how does one separate the wheat from the chaff?
Well, first things first Understand your risk capacity and asset allocation needs before investing in equity funds. But then comes the difficult part. How do you choose which fund is best suited for your needs? Well, here is a collection of distilled wisdom from well-known mutual fund experts.
1. History matters Since returns are the best guide to fund performances, choosing your fund should be a cakewalk. Easier said than done. Because as the cliché goes, past performance is no guarantee for the future . But still if a fund is consistently giving low returns over several years, it is best to avoid it. Also, there are several schemes (Franklin Prima, HSBC Equity and HDFC Top 200 are some examples) which have consistently outperformed their benchmark over the past several years. Better to park your money with the tried and tested.
2. Flow with the tide Look at the pattern of inflows and outflows. Simply because, inflows into equity funds typically chase outperformers and tend to accelerate when valuations move up. Also if a fund is consistently facing large outflows owing to redemption pressures, fund managers will be forced to make drastic changes to portfolios in the short-term, which is not good for your returns. The change in assets under management can be found out from the monthly portfolio disclosures of mutual funds.
3. The cost of investing Look at what you’re spending. This is especially true when markets enter a bearish phase. Funds with high expense ratio can cut down your return dramatically in a bad market, where returns are in single digits. Though a lower expense ratio does not guarantee a superior return, it is a safer bet when things go wrong, provided the fund has a decent performance history.
4. Is it worth the risk? Considering the risk-return ratios such as Sharpe ratio may be a good way to measure the performance of funds. The higher a fund’s Sharpe ratio, the better its return relative to the risk it has taken. |