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Jun 23, 2005, 03.19 PM IST
Many investors believe that the best way to invest in equity funds is to go for top performing funds. Hemant Rustagi says there is more to it than that.
Many investors believe that for investing in equity funds, the best way is to go for top performing funds. They also tend to believe that these funds cannot go wrong and are most likely to replicate their past performance even in the future. The moot question, therefore, is whether you should depend only on the recent performance or there is a need to look at other factors before deciding to invest in an equity fund.
Do you have the right mix of equity funds?
A fund's recent track record at best can be a positive indicator, but not a guarantee that growth will continue in the future. As you review a fund's performance, look at performance relative to funds with similar objectives over a period of at least 3-5 years and probably a complete market cycle. In other words, a those funds that are showing very high past returns because of a very big but isolated period.
The objective should be to select a fund that is managed well and provides consistent returns. For a long-term investor, it is equally important to have the right mix of equity funds. For example, if you were to go by only the recent performance and select the top 3-4 funds, the chances are that you may end up investing in a particular class of equity funds, say, mid-cap funds.
No doubt, mid-cap funds have been doing well for the past couple of years, however, it is not prudent to invest all your money in these funds. The key is to have a variety of funds like diversified funds, mid-cap funds and sector funds in the portfolio to benefit from the true potential of equity as an asset class. In fact, a special emphasis has to be put on having these funds in the right proportion.
As an investor, you may have a personal yardstick, which you may aim to better with your investment in a MF scheme. This may, for example, be the returns that you have been getting from some of the other investment options like deposits, bonds and small savings schemes. As long as your investment in MF achieves that, you will be satisfied. However, to benefit from equity funds in the right manner, it is necessary to look beyond this.
How to get the best returns from equity funds?
To ensure that you get the best in terms of returns from your equity funds, it is necessary to compare your scheme’s performance with that of other schemes in the same category over different time periods. Remember, the performance of a scheme is best measured in terms of total returns. Total return is the percentage of change in the Net Asset Value (NAV), with the ending NAV being adjusted to take into account the dividend distributions made by the fund. While the concept of total return is the best to analyse the performance, it is often ignored by the advisors as well as investors. No wonder, investors are bombarded with “compounded rates,” “effective yields,” “year-to-date rates,” and so on. It is important to know that total return is a useful tool for making comparison between the performances of funds in the same category or a fund and its benchmark.
It is equally important to understand that if a particular fund is not keeping pace with the rest of funds in the same category over a reasonable time period, it makes sense to exit from that and move the money to some other fund that deserves a look from long term point of view. By doing so, you can improve your chances of earning better returns in future.
Review your investments
It’ll be a good idea to periodically evaluate performance of your equity funds as well as the quality of advice and service you're getting from your Advisor. Here’s what should look for:
Another aspect that requires attention is that many investors follow a different strategy at the time of redemption from what they do at the time of making an investment. There is a tendency to hold on to non-performing funds and sell better performing schemes too soon. Remember, it is equally important to take the right decision at the time of redemption as a wrong decision can curtail the growth of your equity portfolio over a period of time.
The author is CEO, Wiseinvest Advisors Pvt. Ltd. He can be reached at email@example.com.
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