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Misleading Mutual Fund Ranking

Mutual Fund Ranking is a big business. Many reputed Personal Finance Advisers and international rating agencies release Mutual Fund Ranking Periodically. Why it’s a Business because these ratings can make or break the fortune of any Mutual Fund Scheme.

Mutual Fund Ranking is predominantly decided based on past performance of 1 Year, 3 Year or 5 Year. There is no rocket science in this. I can also publish my own version of Mutual Fund Rating for my readers. As per SEBI guidelines it is always mentioned for equity linked products that “Past performance is not an indicator of future outcomes”. It’s a hard fact but true. I would like to quote example of SBI Magnum Tax Gain scheme. I invested in this scheme in year 2008 and as per all Mutual Fund Ranking from rating agencies & personal finance advisers, this scheme was best performing scheme in ELSS category in 2008.

At the time of redemption in 2012, i realized that i became scapegoat. The scheme which was best scheme in 2008 in ELSS category was worst scheme in same category in 2011. My real returns from investments in SBI Magnum Tax Gain was negative in 3 years. Now i can’t go and blame Mutual Fund Ranking. But i must admit, Wow what a turnaround in such a short period…Hope, you have not missed the sarcasm behind this :) I can quote numerous schemes but objective is just to convey message with an example.

Another point to note is that even if you invest in best scheme as per Mutual Fund Ranking still there is no Mutual Fund Scheme which can give positive returns when Stock Market is yielding negative returns. Mutual Fund is not a Magical Stick for investor. At the end of the day Mutual Funds invest in stocks only. Majority of Mutual Funds scheme operate within +5% to -5% of return from Sensex. I agree, few schemes perform extra ordinarily but it is impossible for anyone in this world including Warren Buffett to identify such schemes. These schemes keep changing every year and we cannot point out extra ordinary consistent performers

Now you must be wondering that i advising against investing in Mutual Funds. Not exactly, In my personal opinion as a cautious investor and to hedge the downward risk. It is advisable to invest in INDEX or ETF Mutual Funds linked to NIFTY Index. Its a known fact that Index Funds are least risky in comparison to other schemes and are best suited for long term investment. They are least volatile as they invest in best stocks which form Nifty Index in same proportion.

In case you are not keen to invest in Index funds then second best option is to invest in Balanced Funds.  Balanced fund include both equity and debt schemes in portfolio. These funds don’t give very high returns when markets are in Bull Phase similarly downside is less when markets are in Bear phase. In short, it hedges risk to great extent. Secondly check AUM (Assets under Management) of scheme i.e. investor money managed by scheme, it indicates investors confidence in the scheme.

I hope this article will help you to take right investment decision. Rather being misled by Mutual Fund Ranking, its better to do some research before investing.

Copyright © 2011-2013 Nitin Bhatia. All Rights Reserved.

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