How to select the right mutual fund for your investment goals?
The trick is to focus on what is in the hands of the fund house and do it so well that eventually that preparation helps deliver consistent performance
Most people typically depend on past returns while choosing a mutual funds. But the challenge with past returns is that it may not replicate. So what’s the trick to get consistent returns? The trick is to focus on what is in the hands of the fund house and do it so well that eventually that preparation helps deliver consistent performance. Like a cricket team that practises every situation in the nets and plans for every scenario, so they handle the uncertainty of the actual game with professionalism.
The other mistake investors make while selecting a mutual fund is to go by names! The fund house, the fund manager, the so-called YouTube expert and so on. Just because somebody has been successful in the past is no guarantee for the future. Besides, personal biases, styles and beliefs can adversely impact consistency. Reason why replicable methodology should supersede individual brilliance.
A recent investor education campaign by Nippon India Mutual Fund which says, “what is stronger than individuals? Processes,” sums this up beautifully and every investor should keep this in mind. Investors should look for methodologies, the systems and the structures that have led to a fund’s success and ask whether the methodology is strong enough for the future. The Nippon campaign aims to educate investors to take the right investment decisions.
A fund manager has to face the complexities of the market, volatility and an uncertain economic environment, which can pour water on the best investment decisions. Reason why processes are important to mitigate risks.
Nippon India Mutual Fund, as an example, has deployed such robust systems and processes and fund managers are required to work within this framework. Processes help fund managers to know what to do in uncertain times. While he cannot control market movements, processes guide him to know where to invest, when to invest and when he should exit.
The Nippon process, for example, includes guidelines for fund managers to know the kind of risk they can take, how much of risk is allowed and risks that are never to be taken. The process also ensures avoidance of personal biases and concentration risks.
Analysts opine that fund houses with strong processes potentially give higher returns to investors.
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