Last Updated on October 8, 2023 at 5:17 pm
A mutual fund is not an LIC policy. One buys an LIC policy for 20 years to receive money-back every 5 years or so. One does not choose a mutual fund to invest for 20 years. A mutual fund is also not a stock. One need not read a balance sheet or understand the business model to select a mutual fund.
A mutual fund is a professionally managed basket of securities – stocks, bonds, cash or gold. Since each of them is market linked (daily worth = current market value), past performance does not matter and future performance is anyway unknown. Selecting the right equity mutual fund scheme is not possible!
So instead of worrying about which fund to select, why not focus on learning how to review performance? After all, no matter which way we select – borrowed conviction, star ratings, risk-return metrics, downside capture, ulcer index, Information Ratio, Omega Ratio etc. we still need to review performance.
So 15 years ago, I could have done an “inky pinky ponky” to select an LIC Nomura fund or a JM Equity fund. If I had tracked performance and reviewed it with the right context, I could have exited before it was too late (see XIRR tracker post below). This logic applies to any star performer today.
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No, I am not saying we should abandon mutual fund selection. It is common sense to select a mutual fund with a consistent return and risk protection record and it is possible to do in under 30 minutes.
My point is, there is no need to break our head about the selection process. Without a simple and sound review strategy, the selection process is of little use (unless we got lucky).
This post is meant for those plagued by indecision. Not for those who can choose on their own, quickly.
This post is meant for those who recognise that context matters while evaluating a fund. Comparing with peers and looking at star ratings after buying a fund is like blind men touching an elephant! Will soon release a tool to compare performance the right way.
Even if I use the Mutual Fund Screener Version 6.0 (lump sum returns) or the Mutual Fund Screener with SIP Returns, I will still have a shortlist of 5-10 “good” funds. I would still need to do an inky pinky ponky from among them.
If I do not know how to review a fund, it does not matter whether I use rhyme for choosing from a shortlist or from the entire category.
Conditions apply for using inky pinky ponky
I need to have a financial goal (why am I investing) —> I need to choose a suitable asset allocation –> I need to decide which mutual fund category to choose from –> Then select an equity mutual fund or a debt mutual fund from each category from a shortlist using inky pinky.
I have written a series of posts on how to review mutual fund performance. Here is a selection:
How to review a mutual fund portfolio: I discuss simple ways in which a mutual fund portfolio associated with a long-term goal can be reviewed. This is a grey area in personal finance and there is no optimal way to do this. Each individual must necessarily develop their own style of review. So multiple solutions are the norm here.
How to Review Your Mutual Fund SIPs: A simple method to review your mutual fund SIP investments by tracking the month-on-month returns is discussed. This uses the Mutual Fund SIP XIRR Tracker.
Mutual fund performance reviews
You can also check out my mutual fund performance reviews. There are many ways to do this and I illustrate some of them in each post. The method applied is the focus and the fund is only an excuse. For funds that you hold, you will have to review over the period in which you have held the fund. The tools used are linked in the posts.
Mutual Fund Performance Review: Quantum Long Term Equity Fund
Mutual Fund Performance Review: IDFC Premier Equity
Mutual Fund Performance Review: HDFC Equity Fund
Mutual Fund Review: Mirae Asset India Opportunities Fund
Fund Review: Edelweiss Absolute Return Fund
Fund Review: Franklin India Prima Plus
Mutual fund performance review: Kotak Select Focus Fund
Mutual Fund Review: PPFAS Long Term Value Fund
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