Article

How to Select a Plan for Investing in Direct Mutual Fund?

07 Aug 2019

To invest in Direct Plans of mutual funds, you need to screen and identify the right funds. It can be a problem of choice because there are 43 AMCs with over 2,500 schemes. Each scheme has a growth option and a dividend option and each of these options have a Regular Plan and a Direct Plan. To begin with, here is a model that you can deploy to find the right fund.

Fund selection must begin with your financial plan

You always begin with this litmus test. Your first question should be, “Is this fund good enough for me”? Your financial plan lays out your life time goals and the investment mix needed to achieve these goals. Any fund that does not fit into your plan has to be rejected outright. It could either be out of sync with your risk profile or your asset concentration.

Selecting the right asset class

Select a right asset class (equity, debt or hybrid) in which investments are to be made to realize your financial targets on time with the help of available resources and by taking minimum risk. So, if you have substantial wealth, you might not need undue risk to achieve the goals. But in case you don’t have much resources in hand, you may have to take the risky route to reach the goal.

Focus – Consistency over returns

One of the simple ways of looking at fund performance is past returns. Ideally, consider a longer time frame of 3-5 years, if it is an equity fund. That is when equity funds can really give you attractive returns that justify the risk. But quantum of returns or CAGR returns can be misleading. Consider the table below:

Details

Year 1 Returns

Year 2 Returns

Year 3 Returns

CAGR Returns

Comment

Fund A

14%

16%

15%

14.99%

Consistent

Fund B

2%

-6%

58%

15.00%

Unpredictable

If you compare Fund A and Fund B purely on the basis of CAGR returns, they appear to have given similar performance. The advantage with Fund A is that irrespective of when you enter, you can be reasonably sure of returns. In the case of Fund B, the timing of your entry will matter a lot. Prefer a fund that is consistent, even if it means marginally lower returns.

Pedigree can be your final selection point

Pedigree of a fund house is crucial. If you look at investing in a mutual fund, you are actually trusting the fund house to manage your money. The choice made by the fund house directly effects the performance of the fund and your returns. Therefore, before selecting a scheme, it is imperative to verify the history of the fund house and its track record across schemes. If the first three conditions are met, your final choice must be driven by the pedigree.

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Beginner's Corner

How to Select a Plan for Investing in Direct Mutual Fund?

07 Aug 2019

To invest in Direct Plans of mutual funds, you need to screen and identify the right funds. It can be a problem of choice because there are 43 AMCs with over 2,500 schemes. Each scheme has a growth option and a dividend option and each of these options have a Regular Plan and a Direct Plan. To begin with, here is a model that you can deploy to find the right fund.

Fund selection must begin with your financial plan

You always begin with this litmus test. Your first question should be, “Is this fund good enough for me”? Your financial plan lays out your life time goals and the investment mix needed to achieve these goals. Any fund that does not fit into your plan has to be rejected outright. It could either be out of sync with your risk profile or your asset concentration.

Selecting the right asset class

Select a right asset class (equity, debt or hybrid) in which investments are to be made to realize your financial targets on time with the help of available resources and by taking minimum risk. So, if you have substantial wealth, you might not need undue risk to achieve the goals. But in case you don’t have much resources in hand, you may have to take the risky route to reach the goal.

Focus – Consistency over returns

One of the simple ways of looking at fund performance is past returns. Ideally, consider a longer time frame of 3-5 years, if it is an equity fund. That is when equity funds can really give you attractive returns that justify the risk. But quantum of returns or CAGR returns can be misleading. Consider the table below:

Details

Year 1 Returns

Year 2 Returns

Year 3 Returns

CAGR Returns

Comment

Fund A

14%

16%

15%

14.99%

Consistent

Fund B

2%

-6%

58%

15.00%

Unpredictable

If you compare Fund A and Fund B purely on the basis of CAGR returns, they appear to have given similar performance. The advantage with Fund A is that irrespective of when you enter, you can be reasonably sure of returns. In the case of Fund B, the timing of your entry will matter a lot. Prefer a fund that is consistent, even if it means marginally lower returns.

Pedigree can be your final selection point

Pedigree of a fund house is crucial. If you look at investing in a mutual fund, you are actually trusting the fund house to manage your money. The choice made by the fund house directly effects the performance of the fund and your returns. Therefore, before selecting a scheme, it is imperative to verify the history of the fund house and its track record across schemes. If the first three conditions are met, your final choice must be driven by the pedigree.