Last Updated on October 17, 2016 at 10:46 am
Here are some simple suggestions to ease the process of mutual fund selection.
-1: Have a clear objective. Why are you investing? When do you need the money? I am amazed to find that so many people want product suggestions without a clear goal in mind. Without a goal, it is impossible to select any product. If interested, you can consider using the posts on goal-based investing and associated calculators. For example: A Step-By-Step Guide to Long Term Goal-Based Investing
0: After having decided the return expectation and the asset allocation (how much to invest in which asset class), the product category in each asset class has to be decided. Read more: How to select an equity mutual fund -preamble.
Steps -1 and 0 should not take more than 60 minutes to complete.
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1: If you did not understand steps -1 and 0, and if you do you have the confidence to make a choice, within 30 minutes on your own, go to 6, else go to step 2.
2: If mutual funds are chosen for the goal, then the task is to choose one fund from a category. This means first creating a shortlist. There are many ways to do this: How to select an equity mutual fund -creating a shortlist
3: Once you decide a way to shortlist funds, it is important to cast a wide net. For example, choose funds which have consistently beat the category average, or funds which have been in the top 15 in terms of returns. The freefincal mutual fund screener can be used for this purpose. If you demand to see funds in the top 5 or top 3, then you may not find any! Even if you do, they may not stay on top in future. wanting to invest in the ‘best funds’ is, excuse me, immature. Reasonable expectations beget reasonable returns: Mutual Fund Investing: Does Past Performance Matter?
4: Shortlisting can be a two-step process: first look for consistency in reward (return) and then look for consistency in risk management. I usually recommend looking at the downside capture ratio. However, to keep it simple, one can get started with just the reward shortlist.
An alternative approach is to understand the nature of the fund portfolio, the investment strategy and how the fund manager operates. This will take some time and experience. Read more: Quantitative vs. Qualitative Mutual Fund Analysis
Mutual fund investing requires active management and constant learning. So we cannot expect to learn everything and then start. Much of the learning usually occurs on the fly. Just ensure that there are only 1/2 funds in the portfolio. Learning is better than unlearning!
5: Do not expect the shortlist to narrow down to one fund! There will always be 2-3 or more funds which are equally good in all aspects. This is where indecision can waste a lot of time. Just pick one! Don’t overthink the problem. Sometimes you may just have to follow gut instincts. Just make sure that they are yours! Read more: Stop asking already! Mutual Fund Investing is a leap of faith!
6: You should be able to choose one fund in each category within 30 minutes. Else paralysis could set in.
7: If you do not have the confidence to make a choice or if you do not understand the above steps, seek out a SEBI registered investment adviser and insist on direct mutual funds. Read more:How to choose an SEBI registered investment adviser
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