A checklist to select funds

While research or due diligence is necessary before selecting a fund for clients, it is often treated either as a mere formality or at times, completely ignored. With increasing options and varieties of mutual funds, it is imperative to:

1. Stay educated ourselves as advisors

2. Educate our client about the need for research before investing

With over 3000 mutual fund schemes in the market, it is extremely difficult to make an informed choice. Here is a quick checklist for selecting schemes for your clients:

• Identify and understand the different categories of mutual funds such as equity, debt, sectoral, ETFs and so on based on new product regulations.
• Get access to mutual fund data for the following parameters:

• Ignore 1-year performance and risk metrics, as it is too short a period to make an informed judgement.
• Shortlist funds that have a long track record, at least 7 years in my opinion. You may edit it slightly as per your belief but it is always good to have stringent parameters.
• On selection of fund managers, a quick check on the performance of other schemes managed by the fund manager, his/her individual strategy and stickiness towards pre-defined philosophy (especially in bad times) are good indicators to gauge their investment calibre.
• AUM of Rs.1000 crore for equity funds can be considered a good minimum threshold to evaluate a scheme of an AMC. Also, observe the strategy of fund house over the years to deliver consistent returns and look at stickiness of the fund managers and the key employees of the fund house.
• Avoid funds having huge exposure to traditional sectors such as banking (all-time favourite across funds). Look at top 15 holdings and find out if the fund has attempted something different. It is possible that some bold picks and creative decisions have worked well for the fund in the past.
• Keep a track on portfolio churn by carefully looking at the change in portfolio over a course of at least 3 years. For instance, if a value fund changes its portfolio 100% every year, it is not serving its purpose. I am not saying churning is bad but remember it increases costs and reduces returns.

Sankarsh Chanda is founder Savart, an online wealth management platform. He has authored the book Financial Nirvana, a beginner's book for investors. The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.