At the end of 2017, the fund invested in the mutual fund sector is Rs 21.38 lakh crores. It keeps increasing every month. There are 44 fund companies dealing more than 2000 fund schemes in our country. Let us know which scheme is profitable once chosen and what the factors to consider towards that goal are.
Growth history of the scheme
Though it is important to know how much profit a particular scheme has fetched in the past but it’s not only the only factor that matters surely. A rear view mirror in a car is important to take the car reverse but one cannot drive the car only with that mirror. Similarly when considering the income, one should not focus only on the short term benefits but to consider what would the income during a span of 5 to 10 years.
This too is related to the income from fund. In the past ten years, check the growth it has gained each year. For example, what Ganesh invested on grew 10% each year continuously, making his initial investment of Rs one lakh to Rs 2,59,374. But the fund invested by his friend Sundar gained profit and loss in an irregular way, making his initial investment of Rs one lakh to Rs 2,21,922. By this example you can understand how continuous and steady income is important.
Fund performance at the time of market fall
As mutual funds invest in share markets, they tend to reflect the changes in the stock market. At the time of share market growing at 10%, good fund would witness a growth of more than 10 percent. What is important here is when the share market falls by 20% an ideal fund should make a loss less than that.
During 2008, there was a huge fall of share market. Those funds that did not fall to the extent of stock market crash were popular at that period.
While speaking about market fall, an important factor to keep in mind is that a fund that experienced 50% loss should make 100% profit in the next year so as to compensate the previous year loss. That means, when a fund of one lakh comes down to Rs 50,000 due to 50% loss, it should gain 100% profit so as to regain Rs one lakh.
Before investing an investor should decide ‘asset allocation’ based on his or her age. One should determine what percentage to be invested on various categories like large cap, mid cap, small cap and bonds. For example, once the investment on share market is done, the balance investment amount should be considered for other asset investments.
Age of a fund
Generally, it is better to invest on funds that are in the market for long rather than on new funds. Those funds that are in the market for ten years would have survived a few market crashes. Funds that managed to survive market ebbs and bounds can be expected to prosper in the long run.
Size of fund
The fund one has invested should be large in size for investment. Funds that are present for five years should have a few thousand crores in general. Funds with only Rs 5-10 crores will not be able to make any major decisions. Further, a fund with Rs 5-10 crores operational efficiency cannot be predicted how it could effectively operate when the investment reaches Rs 1000 crores.
Ramesh and Suresh are childhood friends. At the age of 30 both of them began to invest Rs 5000 every month on SIP basis. The expensefee in the fund invested by Ramesh was 1%, where as it was 2% for Suresh. Both the funds grew in the same way. At the age of 65 when they reached retirement Ramesh had Rs 34,270,234 but Suresh had only 33,294,070. That means, with a 1% difference in expense ratio, Suresh had lost Rs 9.7 lakhs. Therefore one should remain cautious about the expense fee ratio in the fund.
Before investing in a fund, details of its fund manager and how long the manager has been managing the fund should be known. It will be helpful to know about the growth trend of previous funds the manager dealt with. A fund that grew rapidly or moderately in the last five years suddenly grew in a significant way during the last year, then one should first check whether the fund manager has changed. And only then one should consider whether to invest on the fund or not.
Websites like Value Research Online, Money Control, Morning Star review all types of funds and provide rating accordingly. After considering all the factors, one should verify whether the chosen schemes have 4 or 5-star ratings, ensuring that what is chosen is a right kind of scheme.
Generally, mutual funds will invest on the shares of all kinds of companies. Unlike that when fund is invested only on companies dealing with only one sector is called sectoral fund. As it is only one sector the news published from that sector and policy decisions of government will majorly affect those funds. There will be more ups and downs in such kind of funds. It is better for budding investors to avoid sectoral funds.
(This article was written in Tamil Boston Sriram for Naanayam Vikatan magazine dated on 11/2/18 has been reproduced in English by V Amalan Stanley)