One of the mistake investors does while selecting the schemes for investment is to select the top 1 to 5 ranked schemes based on say 3 months or 6 months or 1 year performance. A Study from 2005 to 2015 shows that the schemes that were in Top 10 based on 1 year performance keeps changing every year. The basket never remained the same. Hence investor should look at few more important parameters than this top rank myth. Few suggestions would be investors should look at the long-term performance consistency more than the category average, outperformance to the benchmark, Fund Manager’s track record, Sharpe Ratio which explains the ability to deliver risk-adjusted good returns.
2. Ascertain your risk profile before parking funds
Investors must ascertain the risk-taking ability while choosing to invest in market-linked instruments like equity mutual funds. It is always safer to invest the long-term funds which is unlikely to be used in the short term in equity funds. Take the professional help of a financial advisor to know your risk appetite and ways to plan the investments.
3. Understand the Scheme Objective clearly and the Portfolio style periodically
Every mutual fund scheme’s core investment philosophy will be mentioned in the investment objective. Investors should understand if the scheme’s objective is matching with what they are looking for. The actual investment structure and style of a scheme could be studied from the stocks where the scheme has invested and the sectoral weight. These information will be available in the factsheet published periodically by the fund houses.
4. Invest Systematically
As one must be knowing, equity markets are subject to constant volatility in the short term. This very uncertainty makes the individuals to stay away from an investment opportunity which has a potential to deliver a share of economic growth in the long run. The reason for fear is the risk of timing the market’s high and low, which no one can predict. Hence the best and time-tested route for such individuals is the SIP. Systematic Investment Plans helps investors to accumulate units of a mutual fund scheme in a systematic and regular basis (say every month). Thereby it helps in achieving better average cost of purchase over a longer period of time. As we witnessed in the history, when markets goes up in the future, investors can enjoy power of compounding and wealth creation.
5. In case of multiple Schemes, spread it in different dates
One viewpoint that investors can consider, when they are already doing SIPs in more than 1 or 3 schemes, is to distribute the SIP debit to different dates, so that they can capture multiple market movements in their investments.
6. Invest for long-term with the periodic performance review of schemes
Once invested in mutual funds, it is advisable to review the performance of the schemes in a reasonable interval, say, 3 – 4 Years. If the scheme is severely underperforming the peer group/category, benchmark or is taking above average risk in the markets, investors can consider changing the investments into a different scheme, by following the guidance from a good financial advisor.
Posted: November 2018