Khota Paisa

How to Select Funds?

Posted in Investment by khotapaisa on September 21, 2009

There are many ways to select mutual fund(s). No two advisors will give you the same answer. Some of the commonly accepted criteria for selection has been past performance, fund manager, size etc. I would try to list out some which I think are suitable to the common investor. Note that this fund selection criteria is applicable to investors who wish to invest for their financial goals, not just for wealth building. It means that for this type of investors, getting the maximum return may not be the best choice.

Old is Gold – Don’t select a fund which is less than 3 years old. The reason being, that the historical fund data is important for evaluation. It is not just the historical returns of the fund which is important but also the consistency of the fund.

Consistency Pays – There are two parameters which should be looked into. One is the historical return of the fund and the other is the volatility of the fund. If your goal is to build wealth, you should pay more attention to the historical returns. But if your plan is to achieve your financial goal (e.g. education, marriage, retirement etc), you should consider the volatility of the fund. This is measured by SD (standard deviation) of the fund. The lower the SD of a fund, the more stable/predictable it’s return. Once you have this information with you, shortlist funds which have the comparatively low SD with better than average return. It may not be one of the best funds in terms of return. But so be it. It’s better so invest in fund with average returns and low volatility than one with high return and high volatility.

Diversify – The meaning of diversification can be different for different people. There are a no. of attributes of a fund on which you can diversify. To make it simple, whenever you add a new fund to your portfolio, check out the top 5 holdings of the fund. If the existing funds in your portfolio give you enough exposure to these companies, you should not consider this fund. In addition, while selecting a fund you should make sure that the fund is not top heavy. Top heavy means that most of the fund investments are in its top 5 or 10 holdings.

Here are some sites which provide you with the necessary data on the mutual funds.

www.moneycontrol.com
www.valueresearchonline.com
www.morningstar.in

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