Apr 30, 2012, 06.31 PM | Source: Personalfn.com

10 points you must know while investing in Mutual Funds

Today, with over 3,500 mutual schemes available in the market the task of picking the right mutual fund can be rather mind boggling. Read this space to know the 10 key points that you should be aware of before investing in a Mutual funds.

Today, with over 3,500 mutual schemes available in the market the task of picking the right mutual fund can be rather mind boggling. Moreover with a tendency amongst investors to fall for the "Rs 10" investment proposition - offered by New Fund Offerings (NFOs), the task of picking the right ones can be even more daunting. While many investors also do feel that 'any' mutual fund can help them achieve their desired goals, let us apprise you that each mutual fund scheme is unique and caters to a certain risk profile. Moreover, selecting winning mutual funds involves a rigorous process, where both quantitative and qualitative parameters are considered, as it is imperative to have consistent performers in your portfolio; those who can stand by you in sickness and health.

Thus while there are host of factors to be studied, while picking a good mutual fund (which may not be everyone's cup of tea to evaluate), we recommend that one can broadly look at the following 10 points, which can enable in selecting the right one:

1. A fund sponsor with integrity

Fund sponsor are individuals who think of starting a mutual fund house. They approach the capital market regulator - Securities and Exchange Board of India (SEBI), who then provide them approval to enter the mutual fund business (after having ascertained their credentials).  After having given the approval by SEBI, the sponsors then establish a Trust under the Indian Trust Act, 1882, and the trustees of which appoint an Asset Management Company (AMC), who then manages investors' money.

It is vital for you investors to recognise this 3 - tier structure of a mutual fund house, as the linkage of the same will help you understand who the promoters are, their record in the financial services domain and the experience which carry along with them. While SEBI would grant a permission to start a mutual fund only to a person of integrity, with significant experience in the financial sector and a certain minimum net worth; it imperative for you to be satisfied (by your own judgement) on these aspects. We believe these background checks are necessary be it sponsors from India or abroad.

2. Experience of the fund management team

While the trustees assign the job of managing investors' money to the Asset Management Company (AMC), a check over the experience of the fund management team may ensure that you give your hard earned money in competent and deserving hands.

While many investors' often get impressed seeing more number of schemes managed by the fund manager (of a respective fund houses); in our view this is rather worrisome since it reflects transcending pressure on the fund manager while managing investors' hard earned money. It may so happen that he may simply replicate the portfolio, and in the bargain defeat the unique mandate of each scheme managed by him. In our view, ideally, a fund manager should not be managing more than 5 schemes; as such a "funds-to-fund manager ratio" can help in bringing in efficiency while managing your hard earned money.

Also we think that one should not merely invest in a respective mutual fund scheme of a fund house, just because it is managed by a star fund manager. Many mutual fund distributors / agents / relationship managers may persuade you to invest in mutual fund scheme managed by a star fund manager; but then you need to ask relevant questions on track record of performance of all the mutual fund schemes managed by the star fund manager (which your mutual fund distributor / agent / relationship manager has high regards), where you need to check the following:

  • Returns of the respective mutual fund schemes
  • Risk investors are exposed to (as revealed by the Standard Deviation)
  • Risk- adjusted returns achieved by the fund (as revealed by the Sharpe Ratio)
  • Portfolio churning (as revealed by the Portfolio Turnover Ratio)
Moreover, as a litmus test you also need to ascertain how the respective mutual fund schemes managed by the star fund manager has sailed during various market cycles (i.e. during bull and bear phases of the markets). Mind you, while your mutual fund distributor / agent / relationship manager may have everything to boast about the star fund manager during the bull phases, the true test of the fund manager (he's promoting) lies during the bear phase. This is because the respective mutual fund schemes managed by the star fund manager must display limited downside risk during the turbulence of the equity markets, thereby attempting to protect wealth erosion. And indeed if the fund manager has delivered a luring performance, then you got to ponder over the question of what should you do if the fund manager leaves the organisation (for better career prospects, or even when he retires).  While this may sound a bit too much of long- term thinking, in our opinion it is imperative if the mutual fund house is not process and systems driven, whereby the fund manager has been given the leeway to manage a mutual fund scheme based on his individual fund management traits.
 

3. Investment philosophy, processes and systems followed at the fund house

After having done an evaluation on the fund manager and his team's experience, what is the broader investment philosophy at the fund house should be well recognised. Moreover, you also need to assess whether investment processes and systems have been well laid down by the respective mutual fund house. It is noteworthy that prudent investment processes and systems have a major impact of individual mutual fund schemes perform, and moreover tend to sail well during the turbulence of the equity markets and also when the fund manager quits or retires from his job. This is because everything is well defined through an investment process and system (along with a mandate which a respective fund follows), and is not left to the fund manager's whims and fancies. It is noteworthy that getting a fund house following strong investment processes and systems is the first, right and very important step in making a prudent investment decision in mutual fund investing.  Hence it is important for you as investors to delve a little deeper in understanding all these aspects before entrusting your hard earned money to a respective fund house.

4. Investment objective

Every mutual fund scheme, irrespective of the category - whether equity or debt has an investment objective. It is this investment objective which entails them to invest in various asset classes in defined proportions. As investors it is imperative to check the investment objective of the respective mutual fund scheme, and thereby see whether it suits your objective of investing as well. For example, if you have an objective of capital appreciation with a long-term investment horizon in mind and is willing to take high risk, then you should be looking at equity oriented mutual funds. Similarly if you are a risk-averse investor, you should be looking at suitable debt mutual fund schemes (depending upon your investment time horizon).

5. Investment style

Further depending upon your risk appetite, you can also structure your mutual fund portfolio as per market capitalisation bias (i.e. large cap, mid cap, small & micro-cap, multi cap and flexi cap) and fund management style (i.e. opportunities style, value style, growth style and blend style).  While one may argue over how the layman can judge which market cap bias and investment style the mutual fund scheme follows; we would like to apprise you that it's all there in the mutual fund scheme's offer document, which you ought to read well before parking your hard earned money.

Q UTI was the only mutual fund for the period of:
1 2

ADS BY GOOGLE

video of the day

Pricey pvt bank valuations to shrink; keep cash: Dimensions

Explore Moneycontrol

Copyright © e-Eighteen.com Ltd. All rights reserved. Reproduction of news articles, photos, videos or any other content in whole or in part in any form or medium without express written permission of moneycontrol.com is prohibited.