HOW TO SELECT A MF

SELECTING A MUTUAL FUND

There are various factors that one has to consider while selecting a particular mutual fund for investment. Before one looks at specific factors there has to be a clear distinction between the type of funds that are present in the market. The overall funds have to be separated in equity funds, debt funds, balanced funds, monthly income schemes or other funds that could be real estate funds or gold funds or some other funds that are newly introduced in the market . Within each of the categories there has to be selection of the relevant factors but here we shall consider some of the features that are important for investors under the areas of debt and equity.

TRACK RECORD OF THE FUND

The fund manager and the way that he manages the fund play a very important role in the overall selection of debt-oriented mutual fund schemes. A lot of active management has to be undertaken in respect of debt schemes where the position for the individual matters quite a lot even when the difference might not seem to be very large. A good fund manager can ensure that the right decisions are taken generating returns for the fund.

The various qualities and parameters used while judging the fund manager will have to be clearly defined and then considered carefully so that the exact ability of the fund manager is evaluated and this is differentiated from market conditions. In this case, the difference in the returns can be quite small as compared to the equity side and hence this kind of careful study is required.

TRACK RECORD OF THE FUND MANAGER

The fund manager is a very important component of the whole investment process. Even though there might be the necessary systems in place in a particular fund house the ultimate buy and sell decisions have to be taken by the fund manager. In this respect the track record of the fund manager and how they have performed through good as well as bad times need to be considered. What is also important is the element of continuity of the fund manager especially with the scheme under management. If there are fund managers who keep moving between funds then it would be very difficult to judge the performance of the fund manager.

INVESTOR NEEDS AND SCHEME TYPES

The needs of the investors have to be considered paramount because they will set the base on which the entire investment is based. Once the needs of the investor are clear one has to see whether the investment in that particular scheme fulfils the need of the investors. For example if there is an investor who wants to take risk that is higher than that of the market then even sectoral schemes might turn out to be a good investment option for the individual

Due to the differing needs of investors there are no schemes that are good or bad or relevant or irrelevant because they might be useful for someone while completely unsuitable for several others. Thus the final suitability will have to be considered in relation to the needs of the investor.

SOME SPECIAL FEATURE

These days there are similar funds belonging to different fund houses and hence making a selection for a particular scheme becomes a very important factor. The scheme that an investor is putting their money into should have something that is different from the other options around so that it has its own place in the investment plan. This means that the scheme should have a distinguishing character that will set it out and make the investment a must.
If the features of a newly launched scheme are completely same as that of schemes that already exist in the market then the investor should go towards the existing schemes because at least there is a track record that one can look at and then make their investment decision. The new feature is something that will add to the overall portfolio of the investor and hence should be present there through a mutual fund investment

PORTFOLIO

Even though this is not the first point mentioned on the check list it is probably the most important point that one has to consider while making a particular investment decision. The portfolio composition in a particular scheme will determine the way it performs in the future as the performance is dependent upon the performance of the assets in the portfolio. No matter what are the scrips in the portfolio one has to check for a few factors that will determine whether there is potential for growth.

The composition of the portfolio in terms of the selection of shares apart the way in which these have been weighted is also an important factor. The composition of the portfolio in terms of the sectoral weights plus the ability for the fund manager to liquidate this in terms of need would also have to be considered carefully.

CONVENIENCE

There might be a lot of things right about a mutual fund but if it does not offer convenience to an investor then it is useless. This means that a scheme where Rs 1 lakh is the minimum amount of investment will not be worth pursuing for someone who wants to invest Rs 10,000. This plus some other conveniences and this factor could change from investor to investor would have to be considered in the decision making process. There are several services that are provided by the funds and these can be matched with the conditions required by the investor to match convenience.

EXPENSE RATIO

Expense ratios eat away at the returns of investors and hence these have to be very carefully watched by the investor and acted upon. There is a cap of the ratio at different rates depending upon the assets of the fund but one must watch out for funds that constantly keep showing a high ratio and those that show a lower ratio because on a compounded basis over a long period of time the returns can turn out to be significantly different.

RISK ADJUSTED RETURNS
Returns for a fund are important because ultimately the investor expects the fund to earn something for her. However just absolute returns might not turn out to be the right prescription for everyone. This is why risk adjusted returns are necessary to see the kind of risk that is being taken for earning a certain rate of return. This will also help in selecting the right type of scheme depending upon their risk profile.


DEBT SCHEMES

Debt schemes invest in a separate asset class and hence there will be some points that will be different for these schemes as compared to their equity counterparts. However some points are also similar in nature and a mixture of all these points will have to be considered before making the final decision.

Fund manager track record
The fund manager and the way that he manages the fund plays a very important role in the overall selection of debt oriented mutual fund schemes. A lot of active management has to be undertaken in respect of debt schemes where the position for the individual matters quite a lot even when the difference might not seem to be very large. A good fund manager can ensure that the right amount of decisions are taken generating returns for the fund

The various qualities and parameters used while judging the fund manager will have to be clearly defined and then considered carefully so that the exact ability of the fund manager is evaluated and this is differentiated from market conditions. In this case the difference in the returns can be quite small as compared to the equity side and hence this kind of careful study is required.

SIZE OF THE FUND

Take a very careful look at the size of debt funds because this can make a huge difference to the way in which they are managed. The lot size for putting through a transaction in the debt market is quite huge and due to this fund with small corpus find themselves on the fringe with these being unable to even gather a diversified portfolio. On the other hand the corpus can also balloon to thousands of crores and even this can be a very tough thing to manage and hence both these extremes should be considered as factors by investors before they make an investment decision with regard to the fund.

When one can match the size of the fund along with the returns and its performance during various phases then the relation between the size and the performance for a specific fund will become quite evident and then this can be used as a factor to decide upon the investment in a scheme.

TENURE AND COMPOSITION OF THE PORTFOLIO

There is a very simple rule as far as debt instruments are concerned which is that the longer the time period of the security to maturity then greater is the impact on the performance of the fund for a given change in the interest rates. Most fund manager use this as a tool to take various positions in the debt market. This feature of the portfolio will also tell you about the risk in the portfolio and the kind of return expected from it

For investors the lessons on t his point are quite clear. The composition of the portfolio in terms of the assets purchased as well as the maturity profile will give an idea about the risk and the kind of expected return from the portfolio. Thus long term schemes can generate high returns when the interest rates are falling but when the rates are on the rise the negative impact can also be quite high for the scheme. On the other hand if one wants top play safe then short term schemes and portfolios would be the ideal choice for investors looking to put money in to a fund.

LOADS

Entry and exit loads are a common part of mutual fund investing and they are quite significant when it comes to equity oriented schemes. In many cases compared to he return that equity schemes generate the load becomes a small part of the investors gain. The situation changes when it comes to debt oriented funds. The best option here is of no loads in these schemes because with the overall returns already being quite low the loads can eat away a significant chunk of the total returns of the scheme.

Most schemes have no entry loads but several of them have an exit load if the investment is withdrawn before a specific period of time. The danger here is that such an exit load can completely disrupt the entire calculation of the investor because of the fact that the overall returns here are not very high and hence even a one percentage figure can make a huge difference to the overall returns of the fund.