A lot of mutual fund investors only have bitter comments about how their investments have performed over the last few years. While the performance of the mutual fund investment is certainly to blame, the problem to a large extent lies in the fact that these investments were not made with an objective and analytical approach.
The truth is that mutual funds today offer the investor a far more varied and diverse range of options. Most, if not all, of an investor's needs can be addressed by a mutual fund. Today, the domestic mutual fund segment has so many fund houses offering a plethora of so many products, that it boggles the investor's mind. The trick is to find a scheme that best suits your needs. If you would like to receive daily NAV alerts in your mailbox, please click here.
Below, we have outlined some very basic steps the investor needs to take before investing.
Step 1
Identify your investment objective:
Broadly investment objectives can be classified in these four categories:
- Short term investing
- Capital appreciation
- Regular income
- Tax-saving
Each investment objective demands a unique approach and mindset. There are different schemes catering to each objective and the investor must select the scheme that best optimises his objective.
Step 2
Select the fund house/AMC
After having identified your investment objective, you now need to select the fund house or Asset Management Company that can best help you achieve those objectives. Selecting the right fund house can be quite challenging for the retail investor. There are two reasons for that - one is the large number of fund houses in the country today that could confuse any investor. The other reason stems from the first - more fund houses implies more homework on your part. However, its not as difficult as it sounds. Typically to identify the right fund house, you need to draw up a small checklist and see how the fund measures up on each one.
a) What is the fund's background?
Check the background of the fund house or to be more precise, background of its sponsors. Do the sponsors have a strong fund management background? Are they known for integrity, conservatism and innovation?
b) How is the fund house's overall performance?
Even if you wish to invest in just one scheme of the fund house, you must check to see how the fund house is performing as a whole. Are its debt and equity schemes both performing well? Has the performance been steady?
c) Has the fund been in the news for the wrong reasons?
Inquire to see if the fund house has got negative reviews in the past for whatever reasons. Has the fund been pulled up by SEBI over any issue? Has the fund defaulted on a promise to the investor like an assured return?
d) What is the fund manager's track record?
Take a look at the performance (risk-adjusted returns, volatility in NAV) of other funds, if any, managed by the same fund manager. Has the performance been steady compared to its peers and the benchmark index?
Step 3
Select the scheme
Identifying your objective and the fund house is half the battle. Once you have selected the fund house you need to see if its scheme matches your objectives. For instance, if you want steady capital appreciation, you need to see if its diversified equity fund has posted capital appreciation over the last three years at a steady rate after considering the quantum of risk undertaken i.e. risk-adjusted return. If you are looking for a regular income stream, you need to see if its monthly income plan has declared dividends consistently every month and so on.
Simple as they may seem, these are the steps you need to take to arrive at the scheme that best fits your investment objective. A lot of investors take the short cut by taking tips from their neighbourhood mutual fund distributor. Actually, that could prove to be expensive as a lot of investors have found out. Investing is serious business and it must involve some thought, analysis and plenty of caution.
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