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How to select the best mutual fund?


As one of my core expertise is mutual funds, one common question I come across often is: “Tell me a good scheme to invest?” To answer this, I used to first ask about the purpose behind the question? Even after asking this, if I still do not get any clarity, I would try prompting further to find out the purpose, whether it’s for education, home, car, vacation, or retirement? The reason for asking this was to find out the investment duration, which is important for selecting the right type of scheme. The usual reply to this is that it is just some surplus money which the investor wants to invest in some better alternatives. But I do also get answers like this: “I would like to double my money!”

What I infer from my 17 years of experience is that the reason for asking the said question is more about seeking an assurance about getting a return above their expectations or earning a return that’s better than other investment alternatives.

So, the core intention is to get superior returns.

The challenge, however, is that scheme performance is never static and is always changing. This is because year on year performance of the same asset class or market cap or stock or same investment style will not be the top performer.

2012201320142015201620172018201920202021
Equity

26%

Global Equity

36%

Equity

30%

Debt

9%

Gold

11%

Equity

28%

Gold

8%

Global Equity

27%

Gold

28%

Equity

22%

Global Equity

17%

Equity

9%

Debt

11%

Global Equity

0%

Debt

10%

Global Equity

14%

Debt

7%

Gold

24%

Equity

16%

Global Equity

19%

Gold

12%

Debt

8%

Global Equity

4%

Equity

-5%

Global Equity

8%

Debt

6%

Equity

6%

Equity

14%

Global Equity

17%

Debt

4%

Debt

9%

Gold

-5%

Gold

-8%

Gold

-7%

Equity

2%

Gold

5%

Global Equity

-3%

Debt

10%

Debt

10%

Gold

-4%

Source: Equity – S&P BSE Sensex Returns, Global Equity – MSCI ACWI INR Terms, Debt -Crisil Short Term Bond Fund, Gold – MCX Prices

As the investment value becomes considerable, one is tempted to spend on lifestyle expenses like home, car, gadgets, and vacations. Also, many times, contingencies like illness or accidents, result in forced withdrawal of money. Temptation is an internal factor and contingencies is an external factor, but both of them have an indirect impact on return and wealth creation.

Also, performance in any type of mutual fund is not linear; they fluctuate due to mark to market. Unlike fixed deposits where the value increases in a straight manner, in mutual funds the value fluctuates. This price fluctuation is what we call as volatility risk.

A person’s perception about life and life goals tend to change every few years which also may impact the individual portfolio. Obviously you want to grow your money and hence, it is very important to determine your risk profile and investment duration, choose the right asset class, and track it,not just in terms of year-on-year performance but also with regard to your personal profile. One needs to keep their investments aligned to one’s personal profile and needs. Another important criteria is asset allocation and diversification, as it is the most important factor to succeed at investing in mutual funds.

There will never be just one best scheme or best return. The important thing is for you to identify a suitable scheme and focus on a risk-adjusted return. The biggest risk while investing in mutual funds is our own behaviour. You don’t need an advisor for identifying the best-performing scheme; for that, you may visit the Association of Mutual Funds in India (AMFI) website. You need an advisor to help you identify your risk profile, investment duration, and manage emotions like fear and greed. Also remember this is not a one-time exercise; it needs to be done at regular intervals as we humans tend to change over time. One needs to stay on course to attain favourable outcomes.

Always remember that there is only one thing that is constant and that is change. So, the best-performing scheme will always keep changing, as will your emotions. Instead, build the right investment mindset, which is neither too agile, nor too rigid.

So now when you seek the answer to the question on which scheme to invest in, be clear about various factors that matter: your expectations, experience, current financial status, liquidity, life goals, aspirations, fear, greed, and so on. In the absence of these, there will never be a true answer you get, other than just random estimates and guesses.

Views are personal: The author, Mithun M Desai, CWM is the Founder and Director of Jumbo Wealth

Disclaimer: The views expressed are of the author and are personal. TAMPL may or may not subscribe to the same. The views expressed in this article / video are in no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you. There are no guaranteed or assured returns under any of the scheme of Tata mutual Fund.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.



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