How to select a mutual fund: Here’s how to get rid of the confusion

New Delhi | Published: March 27, 2017 4:21:05 AM

THERE is nothing wrong in earning high returns but investors tend to overlook consistency. That should be one of the main reasons to select a mutual fund.

If the pitch is good then the rest of your hitters will score, but if the pitch is bad, then it is he will lead you to victory. (Reuters)

THERE is nothing wrong in earning high returns but investors tend to overlook consistency. That should be one of the main reasons to select a mutual fund. Imagine a cricket team with players who can score centuries by hitting the sixes and fours, but when the going is tough, no one has the ability to score runs. Such a side will do extremely well in the right conditions and against certain opponents, but given a tough ground or opposition they will falter.

Similarly, it is important to have a consistent player in your portfolio. Taking the cricket analogy forward, even players with the finest technique cannot be in form all throughout their careers.

It is impossible for a fund to be true to label and continue performing irrespective of market cycles. During a market rally, small and mid-cap funds tend to rise the most. If the fund does well at that time, then it should not do well when the markets fall. In fact, if the fund performs at the same level irrespective of market cycles, then that fund is not being true to label.

Therefore, consistency in the mutual fund business is not scoring a 100 every single time. It is scoring enough runs to get your team to win irrespective of the conditions.

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Measuring consistency

Before investing, many investors review the returns generated in the past one year of a particular mutual fund scheme. One can never tell the outcome of a fund due to volatility in the markets. It may happen that a fund which has outperformed its benchmark this year may end up underperforming next year. So, just as we look at a batsman’s average across years, we should also look at the fund’s batting average (read CAGR returns) across all time periods 1, 3, 5 years and beyond.

Importance of consistency

Any investor would be happy to reap high rate of returns regularly when investing in a mutual fund of his choice. A fund that is consistent and reliable ensures that it stays true to its philosophy, has a team-driven, well-defined research and investment process that generates positive results for investors in the long run.

Viewing the fund’s returns over different periods of time or in different market cycles will tell you if the fund was doing well or not. Further, a fund’s fact sheet displays its returns for three years in sequence along with the relevant benchmark. Always remember, go for the consistent player. If the pitch is good then the rest of your hitters will score, but if the pitch is bad, then it is he will lead you to victory.

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