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Start-up Guide for Mutual Funds

Mutual Fund Investing Checklist

Using the checklist below should help you to extract the most from your mutual fund investment process. We assume that you will be investing largely through mutual funds to meet your targeted asset allocation plan.

1. Draw up your asset allocation

You can use moneycontrol’s Asset Allocator for this. Take a printout of your suggested asset allocation plan so that you can use that to plan your investments across mutual funds.

2. Identify funds that fall into your Buy List

How do you do this? Simple. Just go to Find-A-Fund and run a query specifying the parameters you are seeking.

3. Obtain and read the offer documents

You could do this by either asking your broker or the asset management companies. You might also find some of these documents if you go to our Request-A-Form service.

4. Match your objectives

Read through the offer documents and check to see whether the mutual funds identified meet your investment needs in terms of equity share and bond weightings, downside risk protection, tax benefits offered, dividend payout policy, sector focus and other parameters of relevance to you. For ease in short listing, you can use our Find-A-Fund query module.

5. Check out past performance

Make sure you do this. There is no other indicator that you can use as effectively to select funds for investment. Yet again (we won’t tire of saying this), for ease you can use our Find-A-Fund query module to find out your selected funds’ performance over various time periods.

6. Don't forget the index funds

Index funds offer you probably the ideal hedge against varying performance across sectors and across fund managers over longer-periods of time. moneycontrol recommends that you have atleast some part of your assets in index mutual funds (you would have seen this in your recommended asset allocation plan also if you have used moneycontrol’s Asset Allocator).

7. Think hard about investing in sector funds

Investing in specific sector funds is recommended for aggressive investors. However, if you are not in close touch with the developments in the sector or do not review your portfolio regularly, we would not recommend investing in sector funds.

8. Look for `load' costs

Management fees, annual expenses of the fund and sales loads can take away a significant portion of your returns. As a general rule, 1% towards management fees and 0.6% towards annual expenses should be acceptable. Try and avoid funds that have a sales load, unless of course they have a consistent track record of being a top-performer.

9. Does the fund change fund managers often?

Since you will be giving past track record a consideration, you are inadvertently relying on the continuity of the fund manager. Stay away from mutual funds whose fund managers change often.

10. Look for size and credentials

As far as possible avoid investing in funds with an asset base of less than Rs25 crores. Which means that we are recommending you invest in funds only after they have established a track record. And unless it is a really exciting new (theme) fund that fits into your asset allocation plan, try and avoid new funds.

11. Customer Service

Check out the customer service delivery mechanism of the mutual fund you choose. Can you get in touch with them easily? How long do they take to disburse payments? How often do they send you portfolio updates? And investor newsletters? These questions are important to address because shortcomings on any of these factors could affect your overall returns.

12. Diversify, but not too much

Do not hold just one fund in each asset category. Its good to diversify your risk between different funds, but do not overdo it. moneycontrol recommends two, or maybe three funds in each asset category.

13. Style, not returns matter first in the long-term

Don't let a top performing fund veer you away from a disciplined approach. Stick to your chosen asset allocation plan.

14. Monitor regularly and review

Try to review your mutual fund holdings atleast once a quarter. If you follow the same principles to review as you did to identify the mutual funds you invested in, you will be able to take `sell decisions' very easily. You can read more about this approach by clicking Step 3: Invest Monitor and Review.

15. Invest regularly, choose the MIP

Try to make mutual fund investing an integral part of your savings and wealth-building plan. The monthly investment plan option offered by some mutual funds is a strongly recommended approach for you to execute this process . However, don’t let the availability of this option override your fund selection criteria.

By now you would have identified your list of mutual funds that you want to invest in. List them down with reasons for your intended purchase. Next, you can fill in the application forms for these funds. You can easily obtain application forms for most of the mutual funds from moneycontrol’s Request-A-Form service.