Aditya Birla Sun Life Mutual Fund and Cafemutual launched ‘Smart investing’ - an IAP webinar series that aims to help your clients make informed choices and identify and overcome their behavioural biases. It also prepares them to have a more confident and meaningful discussion with you.
The first episode featured Dhirendra Kumar, Founder and CEO, Value Research, who in conversation with K.S. Rao, Head - Investor Education & Distribution Development, Aditya Birla Sun Life MF shared with us some valuable tips on selecting the right mutual fund.
Let us look at them.
Selecting right mutual funds
- Investors looking for equity funds must consider categories that are diverse enough such as flexi-cap, multi-cap and may be large and mid-cap. They must look into their performance across market cycles
- Investors seek modest returns, tax efficiency, liquidity and the comfort of not losing money in debt funds. These funds thus require a stringent evaluation of what the fund has done in the long-term past. Further, it is not worthwhile to get attracted to a slightly more return and assume risk
- Hybrid funds are evaluated primarily for their discipline, their ability to rebalance, how often they do it and how have they done with their equity and fixed income choices
- Investors must take note of expenses, when everything else is assumed to be equal, expense is the only differentiator
- NAV should not be the criteria to select a fund
- Investors should not chase past performance while choosing a fund
Reading the ratings right
- Rating depicts a quantitative measure of risk-adjusted return and is subject to monthly revision. Risk-adjusted returns take into account volatility which is the yardstick of measuring risk
- It is worrisome when a rating dips below three-star especially if the dip is not for a brief period
- Ratings can be used as elimination criteria. Funds with a 5-7 year history carrying a one-star or two-star rating can be eliminated
Investment time and market timings
- It is not possible to time the market. Investors trying to time the market may lose on some big opportunities
- Investors must clearly define their investment bucket in line with their time-horizon
- Funds available for investments for 5 years and more can be well played in equity
Reviewing the portfolio
- New investors must hold onto their investments for the first three years and refrain from making any changes
- In normal scenarios, it will be reasonable for most investors to do an annual review
- Only after there is a sizeable accumulation, investors can set their asset allocation and should be looking at it to rebalance it
Fund recommendations for first-time investors
- Equity funds - Investors can go for an aggressive hybrid fund as it offers a steadier take on equity and remain invested for three years or they may select a tax saving fund which is like any other equity fund with a three-year lock-in period
- Fixed income funds - Investors can opt for liquid funds and short term funds as they are capable of meeting most of the needs. Conservative hybrid funds can help in optimising the income with some risk
Click here to view the video.
