Mutual fund selection method is one of the least understood process in India, feel experts.
With positive sentiments building on predictions of strong economic growth buoyed by good monsoon and progressive lowering of interest rates by the Reserve Bank of India, there has been strong inflows into mutual funds during recent months. Retail participation has been growing, pushing industry’s asset base grew by 6.5 per cent to Rs 14.4 lakh crore in the April-June quarter.
You too may be attracted to invest in mutual funds for long-term wealth creation. If you are investing on your own, it is difficult to choose between the huge number of mutual fund schemes offered by 42 players in the market.
“Mutual fund selection method is one of the least understood process in India,” Manoj Nagpal, CEO, Outlook Asia Capital, told FeMoney.
Nagpal says that the method used by investors lead to investing in similar schemes which may not be beneficial. He advises diversification of investments. “Most investors use a trailing return performance, dividends paid or alpha that the fund has generated or base their decisions on some of the stocks that the fund manager holds as top holdings. Investors also use a historical perspective of the scheme or a combination of some of the above-mentioned criteria to select funds which may lead to a portfolio construct with similarities rather than diversification.”
However, there are some basic rules that you can follow to make a choice to park your funds, says Nagpal. He suggests selecting funds based on:
- Diversification (not in term of number of schemes, but investment styles)
- Fund manager investment process
- Alignment of investor goals with investment objectives
- Risk profile of investors and asset allocation.
S Sridharan, Head, Financial Planning and Advisory, Fundsindia, advises planned investment into mutual funds. “Planning of investments is the key thing before investments. Even a small vacation in a family itself requires lot of planning in terms of travel reservation, hotel booking, the places of visit etc., When it comes to investments, it can’t be done without planning,” he says.
- Sridharan’s key advice for choosing the mutual funds are:
- Assessing the purpose of investments
- The time horizon of the investment
Sridharan explains if the investor has an aggressive risk appetite, but the money is needed in a 3-year time horizon, he or she should look at investing only in debt-based mutual funds. Though the risk appetite is high, the objective is to be met, rather than chasing returns. Hence, in this case, he may get around 8-10 per cent return as he is investing in debt mutual funds.
However, if the investor is looking out for 7-10 years time horizon, then he can follow an asset allocation of about 70-80 per cent in equity-based mutual funds and about 20-30 per cent in debt-based mutual funds.