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.
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.
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.
Check out Reviews for You Can Be Rich Too
Ten reviews are available for our new book, You Can be Rich with Goal-based investing. Here is a sample:
“A must read for every beginner , or even for a seasoned investor , who are lost somewhere in the process. Each chapter is so nicely explained with no jagrons , be it related to Insurance , Investment , Taxation or Mutual Funds.
And at the end calculators are just an eye opener when you put the real numbers , that makes the end Icing on the cake”. By shavneet on 16 November 2016
Request to Write a Review
If you have read the book, please review it at Amazon/Flipkart/Infibeam/Google Play. It will make us better writers.
Connect with us on social media
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via: Feedburner
- We are also on Google Plus and Pinterest
Do check out my books
My first book is now available at a 35% discount for Rs. 258. It comes with nine online calculators. Get it now . The Kindle edition is only Rs. 199.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You WantMy second book is now only Rs 199 (Kindle Rs. 99) Get it or gift it to a young earner
The ultimate guide to travel by Pranav SuryaThis is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for ₹199 (instant download)
Free Apps for your Android PhoneAll calculators from our book, “You can be Rich Too” are now available on Google Play!
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)