Before investing in a mutual fund, investors often struggle to decide which schemes to choose, and which ones to stay away from. More often than not — most investors take a call on the basis of the scheme’s historical returns.
Financial advisors, on the contrary, tend to assert that investors should take their investing decision on the basis of such factors as risk appetite and investment horizon.
And those who want to decide on the basis of the past returns should look at the rolling returns, and not the trailing returns.
“Assuming that the investor has picked the right fund category for their risk appetite and investment horizon, the factor that they should most focus on is minimising expense ratio. Across countries studies have shown that low expense ratio is a strong predictor of future category outperformance,” says Gaurav Rastogi, Founder and CEO, Kuvera.in.
Here, we give the lowdown on a number of factors that are key to deciding between different mutual funds.
Investment goals
Wealth advisors advise that the investors should have clearly defined financial goals, and choose mutual funds to map these goals.
“Investors should fix your financial goal first and fix your goals' time horizon. Then they should segregate their financial goals into short-term and long-term goals. It's advisable to choose debt mutual funds for short term and pure equity funds only when the time horizon of a goal is more than five to seven years. Then map each mutual fund with that particular goal,” says Preeti Zende, a Sebi-registered investment advisor and founder of Apna Dhan Financial Services.
Past returns
It is always advised, and rightly so, to not take an investing decision on the basis of past returns. Regardless, the past returns are vital, but in the long run — argue experts.
“Look at long-term track records of the fund, rather than short term performance.Ideally, look for rolling returns, rather than trailing returns, for a better perspective on consistency.In addition to returns, look at risk ratios like Sharpe’s ratio etc to get a better perspective on risk adjusted returns,” says Vishal Dhawan, Founder and CEO of Plan Ahead Wealth Advisors.
Some experts advise investors to focus on managing downside risk management instead of focussing too much on generating high returns, investors should
“Investors should ideally focus on managing the downside risk management of the mutual fund before buying it. Always choose your mutual fund based on the Core and Satellite approach, especially for equity mutual funds,” added Zende.
Timing the markets
One of the key rules of equity investment is to avoid timing the markets. Experts assert that investors should refrain from timing the market, and after opting for a fund — they should stick to it, instead of changing the scheme every few months.
In other words, just because some scheme or category has given poor or lukewarm performance, it does not mean it needs to be redeemed. So long as the financial goal is not going to mature any time soon, investors should stick to the doctrine of ‘buy right and sit tight’.
“Give proper time to each chosen mutual fund to witness both the bull and bear phases of the share market. Don’t jump to the conclusion to change chosen mutual funds every 3-6 months just because of market fluctuation,” says Zende.
Maintain consistency
Another key piece of advice that you would get from every financial advisor worth his salt is that you should continue to invest consistently regardless of market fluctuations.
“One should never stop your mutual fund investment because of short-term fluctuations in the share market. Both bull and bear market cycles are important for the SIP to generate good returns in the long run. Patience and discipline in continuing investment in MF investment is very important for reaping huge benefits in the long term,” adds Preeti Zende.
To sum up, investing in a mutual fund is a long-term decision and investors should decide on the basis of long-term financial goals, instead of getting carried away with short term returns.
