Selecting the right fund…!

Selecting the right fund…! Matching your needs with the Investment Objective of the chosen scheme: The Indian Investor is spoilt for choice when it comes to mutual fund schemes. Over the last few years a large number of new Asset Management Companies (AMCs) have set up their shop here. They have launched various innovative schemes to attract investors. Along with their effort the existing AMCs have also renewed their sales efforts and launched a number of new schemes to retain their market share and customer base. As a result no matter what your investment horizon or profile maybe there are a number of existing schemes catering to your need. Hence for any investor the most important criteria are to carefully and systematically determine his/her investment profile and the duration for which he/she wishes to invest. Simple as this may sound it is surprising that a very large percentage of investors do not do this simple step before deciding on the scheme in which they will invest their hard earned money. Very often the decision is simply left to the advice of their broker or a friend. A particular scheme may have generated fabulous returns for a particular investor or may offer extra incentive to a broker. This does not mean that it meets the investment criteria of each and every investor. While not undermining the role of a broker or advisor it is important for every investor to understand the investment objective and track record of the particular scheme which is being recommended. Following this one needs to ask oneself ‘Is the schemes objective consistent with my investment goals?’ .In other words past performance is not the only reason for choosing or rejecting a particular scheme. For instance, for a risk averse investor investing in an aggressive equity scheme will never make sense, regardless of its past performance or recommendations. Usually in a bull market investors who have bought into equity schemes start boasting their returns to friends at parties and other social gatherings. Novice investors start feeling left out and get encouraged to invest in the same schemes which have worked wonders for their friends. This is usually the worst way of deciding which scheme to invest in. To begin with one needs to understand that each asset class has different risk/return parameters. Equities have historically delivered very smart returns but are very volatile and not suitable for investors with a short term horizon or low risk tolerance. Debt on the other hand is more stable yet does not beat inflation in the long run. Gold usually beats inflation in the long run but does not generate returns higher than equity in the long run. Within equity also there are different segments – index, large caps, mid caps, small caps, contrarian, sectoral etc. Each segment has somewhat different risk and return paradigm. Moreover there are different benchmark indices which these schemes track. Therefore even while investing in equity it is important to understand the different nature of the various schemes to find out which particular schemes suit your profile. Within debt also there are various classes like Income, Floating, Arbitrage and Liquid funds. Again each one has different levels of volatility and return objectives. It is obvious from the above that choosing the right type of scheme is no child’s play. Here comes the most important role of any advisor. A good consultant should not only help you determine your investment objective but also help you chose the sort of schemes that will best suit your desires and profile. The last step is to decide that within a particular category of schemes which ones are the best. This is generally quite simple as there is enough published information available on each scheme. Usually the following parameters can help decide which the best schemes are in a particular group -Consistency of performance of the scheme -Out-performance from Benchmark -Track record of the fund management team -Any change in the ownership or fund management team in the recent past. It is advisable to avoid schemes where recent changes have taken place as their past performance and track record is no longer relevant -Generally it is advisable to avoid NFOs unless their objective is different from all other existing schemes