How to select best mutual funds in India

Finding Best Mutual funds in India is not so easy…in fact in the words of Indian DONs – “Inko dhoondna Mushqil hi nahi …namumkin hai”. And moreover financial Planning doesn’t only mean investing to generate high returns…it’s much more than that. But whenever I do portfolio review of any of client the immediate question that comes out is, “please look at the non performing funds and suggest some best mutual funds to generate good returns”.

As equity investments has never received due respect in India and has always been viewed a trading instrument , so for normal Investor, best mutual funds in India means the one which can give maximum return in short term. But a Financially planned investor always view best Mutual funds in India as those which can help him achieve his short and long term goals comfortably.

This article is meant for the latter ones, who search for Best Investment options for their financial planning goals and thus are serious investors. (Read – Best Investment Options In India)

Quoting an article in Business today, “Wealth creation is like Test cricket where a whirlwind fifty or hundred may not always win you a game. You need the solidity of a Rahul Dravid or a Laxman more often than the flamboyance of a Sehwag to be able to emerge victorious over the five days.”

But to be able to find the right fund amid hundreds on offer can be confounding, and if you make the wrong choice you could lose money in a big way. Following are some points which you can keep in mind while selecting a Mutual funds.(Also read mutual fund case Study)

1.       Design an Investment Plan.

Before deciding onto what funds you are going to invest in, you should have clear cut investment plan with you. Your Investment plan should define your investment objective, Time horizon, Risk appetite etc. All this will help you select the right asset class for your investment. Please make sure that your investment objective should match with that of the fund you will select.

2.       Decide on the category exposure of fund.

By fund category I mean that if you are looking for equity investments than you have to zero on to whether you want exposure in large cap, mid cap, small cap etc. or in debt investments whether Short term, medium term, or long term funds suit your profile. This is an important selection since going forward when you are on fund comparing stage you should not compare Large cap fund like Franklin Blue chip with Mid cap fund like IDFC Premiere equity.  You will find the different category of funds in almost all the rating agencies website like Value research, Morning star, Crisil etc.Also read: Equity Investment case study

3.       Past Performance

If you have decided on the category exposure of funds, check out the past performance of those Vis a Vis its peers, benchmark of the particular fund and a common benchmark. Common benchmark can be NIFTY or Sensex .Better to look at both annualised and absolute returns. Many times I have seen that Annualised returns figure don’t show clear picture. For e.g. in the below table both of the funds are showing annualised return of  5.39% p.a , so if we look at the annualised return only, then both of the funds are equal.

But when we dig deeper we can find out that Fund B has always remained inconsistent and it is only in the year 5 when it could match the overall performance of Fund A.

You may also refer some risk adjusted return ratios to do a level II comparison. Some of the ratios like Sharpe ratio, Treynor’s ratio are easily available on the website of rating agencies.

 4.       Refine your research.

The above 3 steps will help you in coming out with a set number of funds or you can say it will help you in rejecting the funds if not selecting among the available universe. Now is the time to refine your research so that you can find out the suitable one for your requirement.

Check out the Fund house details which includes its promoters presence in the financial world, its market image and track records of all other funds which they are managing

Check out for how long a particular fund manager is managing this fund. Longer the tenure, better it will be.Also Read:Wake up call for MF industry case study

This is very important because in Mutual funds, fund manager is always at the driver’s seat so its competency and experience matters a lot. He may not be a best performer in last year but if he’s that good then that will be shown up in his funds’ performance.

Check out Mutual funds Rankings/ratings .Don’t use the ratings as the only criteria to select funds but yes you may refer to them while refining the research. Ratings depict fund’s historical risk adjusted performance over different time frames as compared with the funds in the same category.

In 2008-09 I saw people comparing Equity funds to GILT funds, as gilt funds were giving astonishing returns at that time, same way last year many people are asking about gold funds. We get attracted towards return very easily, without understanding the logic behind it. One has to work on his investment behavior if he wants to generate good returns from his overall investment portfolio. (Read – How to select Debt funds in India)

We all want to invest in best, but in reality there’s nothing that can be called as best. One mutual fund may be best in one parameter but worst in other. For e.g. it may be best in 1 year return but worst in 5 year return, or may be best in Sharpe ratio but may be worse in expenses ratio. So while investing don’t look out for Best Mutual funds in India but best mutual funds in India that is suitable to your risk profile, Investment objective and long and short term goal.