Step-by-Step Guide to Selecting a Mutual Fund

Published: July 26, 2013 at 2:12 pm

Last Updated on

Warren Buffet, in a letter to his shareholders said, ‘do not ask a barber if you need a haircut’. This applies to many situations in life. In the present context, ‘never ask someone in the financial advisory business, if mutual fund selection is hard’.

Selecting a mutual fund is not rocket science. It can be done by anyone. Of course it requires a bit of effort, nothing unnatural about that. Anything in life that is worth doing requires effort.

A while back I posted a pdf file which containuneven stepsed step-by-step instructions to choose a mutual fund. It was well received by many readers. Now that the blog has a much higher readership I would like to re-post the calculator, in the hope that it can be made better with more feedback.

Objectives behind this guide:

  • Create a resource which is simple to understand and easy to use.
  • With a bit of practice, a user should be able to shortlist good mutual funds within 15-20 minutes. It makes no difference if someone takes an hour or a few days. The point is to illustrate how easy fund selection is once you have the right perspective.
  • Mutual funds can be analyzed in many, many ways. The guide should at least use many of important analysis methods.
  • It should first explain in a simple way what the results from the analysis signify.
  • The fund selection must be completely objective. That is it should depend only the results of the analysis. It should take into account long time performance and should not go by fund ratings.

Notes:

  • The guide deals with equity mutual funds. Debt mutual funds are a different ball game. I have mentioned several times in the blog regarding debt mutual fund selection. Shall put them together soon.
  • Before investing in equity, it is important to understand the nature of stock market returns.
  • The guide is based on the resources available at Value Research Online. Other resources like Money Control and Morning Star can also be used.
  • I have not included the evaluation of the fund with respect to its benchmark. I think the analysis methods used in the guide account for this indirectly.
  • Graphical evaluation of long term performance with respect to fund-benchmark like Money Control does is indeed useful. I am working on a guide to evaluate funds we hold. I will incorporate the above feature there.
  • I have personally used this method to choose the funds that I hold.
  • The idea is not to choose ONE fund. The idea is to short-list a few good funds. I am convinced that choosing any fund from the short-list will work for the long-term investor.
  • Evaluating the fund manager or management team, looking at the stability of the fund house, the style of the manager, how often he/she churns the portfolio, the kind of stocks he/she holds are not considered.
  • Such factors are important. However, the long-term performance of a fund should reflect these factors.
  • My primary aim is to show investors how to choose a large-cap fund quickly but objectively. I am convinced the method will work with any type of fund.
  • I make no claim that this is the best such guide or that it is even useful. This is written by a student of personal finance.

Feed back:

  • How can we make this better?
  • What do you think is missing from the point of view of a beginner?
  • What is missing from the point of view of a more advanced user?
  • If you think this is not useful, please let me know specifically what you think is wrong or should be changed.

Update:

June 2015

Part 1: How to select an equity mutual fund -preamble

Join our 1500+ Facebook Group on Portfolio Management! Losing sleep over the market crash? Don't! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free! Did you miss out on the lockdown discount? You can still avail it! Follow instructions in the above link!

Part 2: How to select an equity mutual fund – Creating a shortlist

Part 3: How to select an equity mutual fund – Making a Choice!

Now you can use the Automated Mutual Fund Screener to create the shortlist!

Download the combined PDF version of the updated mutual fund selection guide

Dec. 2012 

Download the Step-By-Step Guide to Selecting a Mutual Fund

 

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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
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