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Choosing a mutual fund…

Before even choosing a fund, its important to choose the category of funds based on your time horizon. Here is an article to help you with that –

Now, here are some important points to consider while investing through mutual funds…

Most of the investors look at the trailing returns to choose a mutual fund, here are few other things you should look at…

  • Looking at a 1yr, 3yr, 5yr trailing returns can be a starting point but only looking at trailing returns is not enough as it is skewed based on the start and end date.
  • Check calendar year returns to see the performance of the fund in each year for the last 3 to 5 yrs.
  • Check Rolling returns with 3yrs and 5yrs to see if the fund has been able to beat the benchmark consistently.

Don’t just look for fund which have Steller performance during a bull market…check if the fund has been able to contain the loss during a crash or bear phase.

To generate good returns from equity, its important that you don’t loose your gains to a market correction, hence its important that you choose funds that limit the downside well, even if such funds don’t always appear on top of charts in a bull run.

For e.g. if your current portfolio is Rs 10 lakhs and if the market corrects in the near future by 50%…

  • If your fund also falls by 50%, your portfolio value would come down to Rs 5 Lakhs but to get back to your original portfolio value of 10 Lakhs, your fund will have to double in value…So to recover a 50% fall, your fund will need to generate a 100% return.
  • If your fund/portfolio falls by only 25% , you will be able to recover the loss by a 33.3% gain

This is the reason that the funds which limit the losses are able to outperform and deliver far better results for their investors in the long run.

When selecting funds in a bull market, don’t get carried away by their market or category outperformance in the latest bull phase. Check out the funds history to see if the fund has been equally good at beating the benchmark and peers in a correction/bear phase. If not, the recent returns could be a flash in the pan.

Market correction is good…

Many investors who have started the investments in mutual funds this year after witnessing an excellent 2017 and a bull rally should be ready for some volatility and may be some downtrend this year. Don’t worry…this is good. Ideally you should increase your investments when the markets are down. You get to buy mutual fund units at much cheaper prices and when the market goes up…you end up getting the best returns for your investments…

for e.g. when you started investing, a unit of mutual fund is say Rs 10…so if you invested Rs 100…you get to buy 10 units. This unit price of Rs 10 will move to Rs 40 in 10-12 yrs but it will not be linear growth…depending on the market it could go to Rs 8 or Rs 5 before moving up.

When the market falls, the same unit can become Rs 5…now when you invest Rs 100 again you get to buy 20 units…so ideally in the initial years of investments, if the markets are down…we should use that as an opportunity to invest more so that we can get the best returns on our investments when the markets start moving up.

Now, one of the most important things – The Exit

While it is important to select good funds and stay invested for long term, it is also very important to plan the exit. As mutual funds are market linked…it is important not to exit when the markets are down, you should exit when you have met or are near the goal & while the markets are up.

To do this, you need to start looking at the markets 2-3 years ahead of your goal. For e.g. if you had planned for 20yrs and if the markets are good in 18thor 19th year…you would have already achieved your goal or would be very near to it. At this point, you should move your funds to a conservative/stable …liquid, debt or equity saving fund. This strategy will protect you from potential loss in case of a crash in the 20th / goal year.

We can help you plan & invest for any or all of your financial goals…email or call to book an appointment for a discussion – / 9916804769

We also have a Telegram group to discuss and share matters related to Investments – Stocks, Bonds, Mutual funds and all aspects of Personal Finance. I invite you to join the group by clicking on the below link…

Happy Investing