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Mutual Fund Investment Guide
Introduction
There are more than 800 mutual fund schemes in India offered by 44 fund houses (as of Nov 2019).
These fund schemes come in a wide variety of options, investment styles, and investment objectives. It’s baffling.
How do you go about choosing the best ones for your portfolio that will help you meet your goals?
How do ensure that you don’t make grave mistakes in your selection and rather pick schemes that will take care
of your money as their own?
How do you choose those funds that do not take undue risk and yet generate an adequate inflation-beating
return to help you build your wealth to meet goals?
Given the wide choice, many well-meaning organizations and individuals have come up with ways to help you select the best mutual funds that channel your savings, which can grow them at a reasonable risk.
This help comes in the form of ratings, rankings, and opinions.
Unfortunately, none of them makes your job of selecting mutual funds absolutely easy.
At best, they act as first-level filters.
You still have to make choices from the reduced list of options.
What to do?
Which funds should you pick?
How do you build a decent portfolio that puts your money to work while you focus on what you are good at – your work and growing your income?
While there is a ton of advice on how to select mutual funds and how to build a portfolio, there is very little on what NOT to do.
So, let’s invert the ‘selection’ process and understand how NOT to
select mutual funds.
Finding a good mutual fund scheme relevant to your needs is like finding a needle in a haystack.
You start to apply various filters and shortcuts to find these needles in a haystack, to select mutual funds that you should invest in.
Due to a lack of time, effort, and inclination, you pick and choose your funds using easy, convenient, and obvious indicators such as:
Star Ratings – Typically 4 to 5-star rated funds
Past Returns – Funds with higher 3 to 5-year returns should be better than the rest
Brand – a popular, well-known brand
Friends, Colleagues, and Popular media – You feel you can trust them.
Let us understand each of them – one by one.
1 Star Ratings
Star Ratings is an idea that we use in almost every aspect of our lives for evaluating hotels, restaurants, business services, websites, advisors, etc. Everything has a star rating.
The star ratings just make it easier for us to decide.
I mean how else do you find out whether to put your money into that product/service or not?
It is convenient to rely on existing user experiences, which are reflected in the ratings.
Now, when it comes to mutual funds, you would prefer to invest in a 4 or 5-star rated fund.
You believe it to be the best. Right?
Not really. There is a big problem with the star ratings of mutual funds.
First, these star ratings do not reflect user experiences as they do for hotels or e-commerce sites.
They are created based on a complex methodology using past returns and risk and are developed by the ranking/rating organizations.
Second, mutual funds are not able to maintain their ratings over time.
If you track the ratings over 1 3 or 5 years of various mutual funds, you would see that the ratings change almost every year, sometimes every few months.
Since they are based on quantitative factors only such as risk and return, as the numbers change, the ratings change too.
It is not surprising to see a 5-star rated fund being downrated to 3 stars and vice versa.
If you go to any of the rating portals, like Value Research or Morning Star, you can track the ratings of the fund schemes and see how these ratings change for the funds that you are invested in or want to invest in.
| Author | – |
| Language | English |
| No. of Pages | 41 |
| PDF Size | 4 MB |
| Category | Stock Market |
| Source/Credits | unovest.com |
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