A year ago, you and your friend invested money in a similar equity mutual fund of two different fund houses.
A year ago, you and your friend invested money in a similar equity mutual fund of two different fund houses. But both of you now have different rates of return despite investing in the same type of fund. While both of have invested in funds that have equities as the underlying asset, your friend’s fund has given much higher returns that yours. This is am extremely possible scenario. As an investor you should ask yourself a few questions. What is the investment strategy of the fund in which I had invested? What is the market like today? Is the fund meant to perform in the current market conditions? And the most basic question: Is a one -ear time frame good enough to judge an equity fund’s performance? There are many strategies involved in the fund’s decision making. Broadly, there are two: Aggressive and conservative, both of which have a direct impact on the rate of returns of the fund and which makes a fund unique.
Structure of a financial product
As an investor, your decision to invest depends on your age, income, financial responsibilities, risk taking capacity, etc. Likewise, there are many factors from a fund house perspective which affect the rate of returns. Market conditions (domestic and global) and the eco-political scenario play a major role but the philosophy of a fund house remains a very important factor. An investor must know all of these in brief before making an investment decision. This is very important as one looks at the way the fund has performed. One needs to see if there have been wild swings in performance given slight market movement, or have there been slight shifts in performance given wild market movement.
Equity is a high risk–high reward product. We live in a globalised world—if a macro-economic or political event takes place in one corner of the world, it has a significant impact — either positive or negative — around the world. However, the intensity varies from country to country, but the impact is unavoidable.
It may or may not be easy for investors to understand the philosophy of a fund. In general, aggressive and conservative methods are the two main methods of an investment philosophy. If you have a long-term investment horizon, then you should not worry about short-term volatility prevailing in the equity market and you should select a fund that believes in the same philosophy.
If your fund house is churning your portfolio regularly (3-4 times in a year) then you must understand that the fund has an aggressive strategy. It may be good or bad from returns on investment perspective but regular churning of portfolio raises the cost of managing the fund and it goes from your pocket. It is advisable to remain invested for appropriate time and avoid frequent churning of your portfolio.
Read the past fact sheets of the fund and see how consistently a manager is sticking to the stocks purchased. Don’t compare returns on investment only. You need to consider the expense ratio, frequency of portfolio churning and track record before investing in a fund.
—Quantum Mutual Fund