Here is a list of attributes necessary to select and stay invested in actively managed mutual funds if you do not wish to invest in passive mutual funds.
Before we begin, we caution the young earner that less than half the active funds in any category manage to consistently beat an accessible benchmark and it is not some recent or temporary phenomenon.
See:
- Only 42 out of 260 equity mutual funds consistently outperformed the Nifty 50!
- Myth Busted: Active mid cap mutual fund managers can easily beat the index
- Why investing in small cap mutual funds does not make sense!
- Only these 3 Small Cap MFs have outperformed Nifty Next 50 consistently
- Active mutual funds struggle to beat the Nifty 50 for the last seven years!
Therfore choosing index funds is the simpler and smarter choice. Not because of low fees or more returns. But because we eliminate fund manager risk and nearly eliminate the effort associated with fund performance reviews and invest in peace.
Inspite of these obvious benefits, if you still wish to invest in active mutual funds, we have the following recommendations.
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- Do not get carried away by outperformance. It is likely temporary and will disappear soon. My portfolio is the best example of this: Portfolio Audit 2022: The annual review of my goal-based investments. Over the long term, all instances of such outperformance are due to luck than expertise.
- Be ready for sustained periods of underperformance. If you think switching funds will solve the problem, think again. Your old funds will start performing after you quit on them and your new ones will start underperforming after you started investing.
- Never ever be carried away by returns over the last year and buy an active fund. What has gone up is just waiting for you to buy to come down.
- Never look at star ratings or compare your funds with peers. It would only result in portfolio clutter. Soon you might just be buying the “market” at much higher fees. This is considerably worse than a concentrated active MF portfolio that has the potential to significantly outperform or underperform the market.
- Regularly rebalance the portfolio. Particularly shift gains from active funds to fixed income from time to time (as per the asset allocation plan). Even if this does not give you an actual benefit (wrt to a passive MF portfolio), there is at least the psychological benefit to rejoice over.
- Finally, what I have learnt from data and experience, choose an average or bit above average performer that investors are not talking about. That is a “quiet fund”. At least for a while, you can invest in peace without too much AUM flocking in. See: Mutual Fund Investing: Does Past Performance Matter?