Did Modi 2.0’s Budget Make Investing In Mutual Fund Easy?
Jul 10, 2019

Author: PersonalFN Content & Research Team

(Image source: Business card photo created by rawpixel.com via freepik.com)

According to various media reports, out of India's total working population of a little over 47 crore, only about 29 crore people have a PAN card. However, approximately 90% Indians have Aadhaar card. The government's recent decision of allowing Aadhaar to be used in lieu of PAN, wherever the latter is required, is likely to make investing in financial assets easy.

In the Budget speech Ms Nirmala Sitharaman stated that, "It is proposed to provide interchangeability of PAN and Aadhaar to enable a person who does not have PAN, but has Aadhaar to use Aadhaar in place of PAN under the Act. The Income Tax Department shall allot PAN to such person on the basis of Aadhaar after obtaining demographic data from the Unique Identification Authority of India (UIDAI). It is also proposed to provide that a person who has already linked his Aadhaar with his PAN may at his option use Aadhaar in place of PAN under the Act."

As you know, to open a bank account or invest in mutual funds, one needs to have a PAN. Now, those who have Aadhaar but not PAN card would be able to invest in mutual funds without having to apply for the PAN.

But the ease of investing is one thing and a smart approach to investing is another.

Your decision to invest in a particular mutual fund scheme shouldn't be based on how convenient it is. Rather, you should consider your financial goals, time horizon, risk appetite, and personalised asset allocation before committing your hard-earned money to any mutual fund scheme.

Selecting a right mutual fund is a skilled job. You need to consider various factors when shortlisting the right mutual fund schemes for your portfolio. Once you zero-in on the right ones, you need to take a Systematic Investment Plan (SIP) route to deal with the market volatility effectively. Investing in direct plans can help you accelerate returns.

Here're some parameters to select suitable mutual fund schemes for your portfolio.

Quantitative Parameters:

  1. Performance and risk analysis

    This is to analyse if the fund has shown consistency in performance across various market periods with decent risk-adjusted returns. Under this, the fund needs to be ranked on quantitative parameters like rolling returns across short-term and long-term durations, such as 1-year, 3-year, and 5-year periods, and on risk-reward ratios like Sharpe Ratio, Sortino Ratio, and Standard Deviation over a 3-year period.

  2. Performance across market cycles

    You need to ensure that the fund has the ability to perform consistently across multiple market cycles, i.e. bull and bear phases. Therefore, compare the performance of the schemes vis-a-vis their benchmark index across bull phases and bear market phases. A fund that performs well on both sides of the market should rank higher on the list.

Qualitative Parameters:

  1. Portfolio Quality

    The portfolio quality of a fund points at how it is likely to perform in the future. Here's what you should pay attention to:

    Adequate Diversification - The fund should not hold a highly concentrated portfolio. A concentrated portfolio heightens the risk involved. Hence, the portfolio of a fund should be well-diversified and the exposure to the top-10 stocks should be ideally under 50% while concentration to one particular sector should not exceed 30-35%.

    Credit Quality - For debt portfolios, you need to ensure that the fund does not hold a high proportion of low-rated (securities rated AA or below) or unrated debt instruments. A fund with a higher credit quality should be ranked higher.

    Low Churn - Engaging in high churning can result in trading and high turnover cost. Therefore, you also need to consider the portfolio turnover ratio and expenses and penalise funds involved in high churning, i.e. those funds with a turnover ratio of above 100%.

  2. Quality of Fund Management

    Further, consider the fund manager's experience, the workload, consistency of the fund house in clocking returns, and proportion of the AUM (Assets Under Management) of the fund house actually performing. Therefore, check the following criteria:

    The fund manager's work experience - He/she should have a decent experience in investment research and fund management, ideally over a decade. However, experience simply isn't enough. Some schemes that are managed by fund managers with 15-20 years of experience haven't done consistently well over a long time frame.

    The number of schemes managed - A fund manager usually manages multiple schemes. Ensure the fund manager is not loaded with a large number of schemes. If they manage more than five open-ended funds, it should raise a red flag.

    The efficiency of the fund house in managing your money  - You need to check if the fund house consistently performs across schemes or if only a few selected schemes are doing well. A fund house that performs well across the board is an indication of sound investment processes and risk management techniques in place.

Yes, we know that the above list is a lot for an average investor to look at. It involves arduous number crunching and much of the data is not easily available in one place. But if you do need to narrow down on the top funds, these factors are of utmost importance.

To know more about selecting winning mutual funds, watch this short video:

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