Three important things to consider while investing in equity mutual funds

By: | Updated: December 4, 2018 4:56 PM

While many investors may be tempted to shortlist funds based on recent performance, this may not be an ideal approach. Choosing the right fund is more crucial than picking the best performing funds, says Jason Monteiro of Prabhudas Lilladher.

“When investing in equity mutual funds, one should keep an investment horizon of 3-5 years, if not more,” Jason Monteiro of Prabhudas Lilladher said.

While many investors may be tempted to shortlist funds based on recent performance, this may not be an ideal approach. Choosing the right fund is more crucial than picking the best performing funds, says Jason Monteiro of Prabhudas Lilladher. A top performing fund today, may not necessarily be a top performing fund tomorrow, he explains.

Sushruth Sunder of FE Online recently interviewed Jason Monteiro, AVP- MF Research & Content at Prabhudas Lilladher who shares interesting insights on the ideal holding period for mutual funds, factors to consider while investing in mutual funds and things to keep in mind while investing through SIPs. Here are edited excerpts:

A recent AMFI report noted that a whopping 51% of equity assets get withdrawn before a year gets over. Is there an ideal holding period for mutual funds?

When investing in equity mutual funds or equities in general, ideally, one should keep an investment horizon of 3-5 years, if not more. Unfortunately, investors tend to churn their portfolio based on the recent performance of their funds. Most retail investors tend to enter at the fag end of a bull run, but when the market underperforms, they tend to panic and redeem their investments. This behavioural trait deprives investors the world over from generating long-term wealth. The best way to deal with this is to align investments to financial goals, and stick to a financial plan.

How should investors go about while choosing funds to invest in? What factors should they consider?

Choosing the right fund is more crucial than picking the best performing funds. Most investors select a fund by looking at the recent performance. Simply looking at past performance is not the ideal approach. A top performing fund today, may not necessarily be a top performing fund tomorrow.

One needs to look at quantitative, as well as, qualitative factors when short-listing mutual funds. The quantitative aspect should cover how the fund has performed on a risk-adjusted basis (Sharpe Ratio is a good indicator) over multiple timeframes, spanning from 1-3 years, and if it has generated an above-average alpha versus the benchmark over the periods. Apart from this, one needs to look at qualitative aspects, such as the fund house integrity and fund manager pedigree before zeroing on the right fund.

The right asset allocation depends on ones investment horizon and risk appetite. For an investment horizon of three years or more, an aggressive investor can keep an 80:20 (Equity:Debt) exposure. Moderate investors can invest equally across equity and debt, while conservative investors can keep an 20:80 ratio. For a personalised asset allocation plan, it would be best to consult a registered investment advisor.

What advice would you like to give to retail investors investing through SIPs?

When investing though SIPs, one must remember that the primary objective is to lower the average cost of the investments. Thus, the key to earn positive returns is to keep the systematic investments active, especially when the market underperforms. When the markets turnaround, is when the true advantage of investing through SIPs will be realised. Given the deep correction in Mid Cap and Small Cap Funds, now would be a good time to start a SIP or increase your exposure in these categories of funds, keeping an investment horizon of 3-5 years.

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