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How not to select a mutual fund

Do you look at the list of the best 5 or best 10 mutual funds when deciding to start a SIP? If yes, you should definitely read this post�

May 04, 2012 / 12:53 PM IST

By Lovaii Navlakhi

Do you look at the list of the best five or best 10 mutual funds when deciding to start a SIP? If yes, you should definitely read this post�

Past performance is definitely an important criterion for evaluating mutual funds, but do not go only by past performance.

Following best performing schemes in the past three, six, or 12 months does not guarantee superlative performance. Often a fund with the best one month performance may be nowhere even in the top 20 when this comparison shifts to a one year or three year period. Likewise, a fund with a good five year track record may be showing dismal performance in the last six months. You need to go deeper before making a selection purely on this basis. Look for funds that have done well across market cycles and investment cycles � funds that have performed consistently - in good market , bad market , quiet market and roaring market. Your choice should figure in the top 10-15 schemes at least over five yrs returns.

Second if you are looking at investing some spare cash which you may need in a year�s time, then don�t go blindly looking for equity funds only. Do not ignore the objective and time horizon of your investment. The mutual fund you select should be governed by what is the purpose of YOUR investment � is it for a specific goal, like a exotic holiday or a special gift for a loved one or a future goal like child�s education, your home etc. Depending on your motive and the time that you need this investment back, the funds you consider will vary. Equity maybe predominantly large cap for a child�s education, equity aggressive mid cap fund for holiday planned for three years later and a debt fund for spare cash which is required six months later.

Third, look closely at the objective of the fund. We have often found a supposedly mid cap fund at the time of our recommendation becoming prominently large cap six months down the lane.

Fourth in these days of �aayaram gayaram� fund managers, the pedigree of the fund house becomes very important. Do not overlook attributes like promoters of the fund, systems and processes followed, track record in India, performance globally if it is foreign tie-up or fund.

What matters finally is that the selected fund should match your risk profile and appetite and suit your investment objective and time horizon.

The author is the Managing Director and Chief Financial Planner of International Money Matters Pvt Ltd.

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