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7 Steps to Select Right Mutual Fund

mutual fund
mutual fund

Selecting Right Mutual Fund is like selecting Right Life Partner. Any wrong decision can wipe out your personal wealth. What makes it more difficult is volatility in performance of mutual fund. Some people select Mutual Fund only on the basis on their rankings. In my post on Misleading Mutual Fund Ranking i highlighted disadvantages of same. I would like to ask my readers, if mutual fund rankings are 100% correct then all portals or financial advisers should suggest same set of mutual funds to their clients or readers.  You will find large variation in the rankings of Mutual Funds. Second problem is volatility in performance. A star performer fund this year might be worst performing fund next year. It is advisable to review the investment portfolio every 6 months. In short, undertake the exercise of selecting right mutual fund every 6 months. Third problem with Indian investor is that they invest without evaluating the investment objective. Reason being investment objective help to decide in which mutual fund class the investor should invest. Lastly, it is absolutely necessary to understand in which direction economy will move in next 12 months. I agree and understand that it is very difficult exercise but atleast, you should have reasonable idea. For example, even if you are investing in debt funds considered to “safest” then also you have to select short term, long term, gilt or income fund. Selection will depend on how the interest rate movement is projected for next 12 months. If interest rates are projected to fall as in current scenario then it is wiser to invest in long term debt fund. Whereas during increasing interest rate scenario, short term debt funds deliver good returns.

7 Steps to Select Right Mutual Fund?

(a) Investment Objective: As i mentioned that first we need to understand investment objective i.e. why we are investing?. Investment objective might be long term, short term or linked to any event like kids marriage. Secondly, depending on investment objective the risk factor can be decided. In short, as an investor how much risk i can take with my investments. Many financial advisers suggest that Debt Funds are risk free. I beg to disagree as they can also potentially deliver near zero returns or negative returns in short term if not selected properly. This step help to decide macro level selection of mutual fund type. Assuming i decided in favour of Equity as my investment objective is long term and a portion for short term objective.

(b) Outlook for Economy: Depending on next 12 month’s outlook for the economy, you can select sub-class of mutual fund. Let me admit that no one can get it 100% right. Even so called investment gurus cannot predict correctly. Its purely judgmental power or assessment of current situation. I would like to quote example of PSU stocks. During H1 of 2014, all the investment gurus were gung-ho about PSU stocks or mutual funds with heavy exposure in PSU stocks. The reason for this euphoria was anticipation of revival / focus on PSU’s by new government. People invested left right and center in PSU Stocks or PSU oriented mutual funds. End result, after 6 months the returns were negative as Govt decided to close sick PSU’s instead of reviving them. Infact recently i read that govt has provided funds to only 9 PSU banks which are performing well. Going forward, Govt funding will be performance based which will further stress non-performing PSU’s. Therefore you should only listen to your mind in this regard. Now assuming that based on my assessment, i anticipate that Large cap and Banking stocks will do good in next 12 months. For my short term objective, i shortlisted long term funds under debt category as interest rates will drop in coming months.

After 1st two steps, i will shortlist Mutual Fund Sub-Classes in which i will be investing. It is always advisable to shortlist atleast 2-3 sub-class for investment to diversify risk.

(c) Rankings: Mutual Fund Rankings should be 3rd in order. You will observe that particular mutual fund ranked 5 star in rankings of portal X is ranked 2 star on portal Y. It is quite confusing and everyone has its own way of ranking mutual funds. Normally mutual funds are ranked on multiple factor with highest weightage to returns. The best strategy is to pick up 2 rankings which you trust the most and select mutual funds within shortlisted sub-class which are ranked 4 star or 5 star. Now check in this list which mutual funds are common between 2 rankings. This is your final shortlist on ranking front. Personally i trust Mutual Fund rankings of CRISIL and Value Research Online. Though there are variations between two but i observed that these two rankings are unbiased and are done with an objective. “It is my personal opinion”.

(d) Assets Under Management (AUM): In my opinion, Net assets of any scheme gives fair idea of confidence level of investors in the mutual fund scheme. This confidence is built over a period of time. Secondly, fund houses deploy their best fund managers for flagship mutual fund schemes with high AUM. Therefore on this parameter you may drop mutual fund schemes with below average AUM in particular mutual fund sub-class. It will help to zero-in schemes which are there in market from some time and have seen complete learning cycle to make right investment decisions.

(e) Exit Load: It is important to check Exit Load of the mutual fund scheme as you might need money before investment horizon. I made this mistake and invested in a debt scheme A without checking exit load. The exit load was 3%, within 365 days. I liquidated after 10 months. The returns from the scheme was 4.5% and 3% was deducted as exit load. Anyways i learnt from my mistake. Now i always check exit load before investment. From the shortlisted list, you may drop schemes with stringent exit load criterion which does not suit your requirement. Try to retain the schemes with minimal exit load requirement.

(f) Expense Ratio: While calculating returns from the scheme, it is advisable to check the expense ratio as expense ratio eats into returns from the scheme. Normally schemes with expense ratio of upto 1.5% are considered OK as per industry experts. Higher expense ratio may not impact good performing mutual fund schemes too much but will hit hard when fund start performing badly.

(g) Consistent Performance: For mutual fund rankings or most of the analysis, one year return of any mutual fund scheme is considered. It is critical to check consistency in performance. For that you should also check 3 year and 5 year returns of the scheme. It will help to understand whether mutual fund scheme is fad or consistent performer. You may find lot of schemes with 4 star rating with highest return on  1 year criterion but delivered poor returns in last 3 years / 5 years. Such fads should be excluded from your shortlist.

After this exercise you are left with GEMS in your portfolio. Instead of investing lump-sum, you can invest through SIP in 3-4 good mutual fund schemes. Though mutual fund is projected as safest way to invest in stock market but it is not true. All investments are subject to market risk and timings play very crucial role in your returns. No one can time the market but it is advisable to study the trend before investing. Through this post, we tried to minimize as much risk as we can by following proper selection process. Happy Investing !!!

Copyright © Nitin Bhatia. All Rights Reserved.

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rajiv ahuja
rajiv ahuja
9 years ago

What are your views on UTI Balanced Fund & ICICI Pru Advantage balanced fund. My investment horizon is 5 years. Should I exit them ?

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  rajiv ahuja

You may exit from both UTI Balanced Fund and ICICI Pru Advantage balanced fund as both are delivering below category return. As your preference is Balanced Fund – Equity oriented, you may check ICICI Prudential Balanced Fund, Tata Balanced Fund or HDFC Balanced fund.

rajiv ahuja
rajiv ahuja
9 years ago
Reply to  Nitin Bhatia

The exit load & STCG will be there since I invested in July 2014. What is your advice ?

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  rajiv ahuja

In this case, you stay invested min for 1 year from the date of purchase.

rajiv ahuja
rajiv ahuja
9 years ago
Reply to  Nitin Bhatia

Thanks for the input.

Prashant
Prashant
9 years ago

I need to monthly Rs1000 each on 5 different SIPs. Could you please suggest me the best five. Also is the right time to invest in SIP. I have zero knowledge on it

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Prashant

Please let me know your age, how much risk you are willing to take and what is time horizon of investment.

Prashant
Prashant
9 years ago
Reply to  Nitin Bhatia

I’m 38 years. Moderate risk….Investment 5-10yrs
or else you can suggest me considering my age for how much time I should invest and how much risk should I take

Prashant
Prashant
9 years ago
Reply to  Prashant

Awaiting your valuable comments

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Prashant

For moderate risk, you may opt for mix of equity and debt oriented balanced funds. i suggest following funds
1. ICICI Prudential Balanced Fund – Regular Plan
2. SBI Magnum Balanced Fund
3. Franklin India Pension Fund
4. ICICI Prudential Child Care Plan – Study Plan – Regular Plan
5. UTI CCP Balanced Fund

To answer your other queries, i need to go through your existing financial portfolio

Srividhya Prasanna
Srividhya Prasanna
9 years ago

Hello nitin sir

I am 27 yrs old. I would like to invest in mutual funds for long term period of 10 to 15 yrs with moderate risk taking ability. Is sip the best option or should I invest in lumpsum. Suggest me five best mutual fund plans. Which sector is performing well now sir ( for eg pharma, banking, blue chip etc)

Nitin Bhatia
Nitin Bhatia
9 years ago

You have not mentioned, how much amount you are planning to invest. .

Generally, you should take Value Investing route instead of SIP. Currently Banking and Pharma are expected to do well. Lot will depend on Monsoon. You should start with small amount till the direction of market is clear.

Vinit Deshmukh
Vinit Deshmukh
8 years ago

I am 25 years old , I would like to invest 2000 Rs each in two SIP mutual fund for 5 to 10 years with moderate risk. Currently market is on bull, so is it good time to invest?
In which type should I invest Equity or Debit?
Please suggest specific names of schemes.

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Vinit Deshmukh

Equity of Debt will depend on your overall portfolio. You can start SIP in following 2 funds

1. ICICI Prudental Value Discovery Fund
2. ICICI Prudental Focused Bluechip Equity Fund

Anoop
Anoop
8 years ago

I am 26 years old, planning to invest Rs. 2000/month in two SIP mutual funds (one with high risk and one with moderate risk) for 5 years. Can you please suggest some funds?

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Anoop

Sundaram Select Mid Cap fund and ICICI Prudential Focused Bluechip Equity Fund.

Sumit
Sumit
8 years ago

Hello Nitin Sir,
Sir, I am 31 years old. my monthly salary is 45k. I am investing 1000/month in 3 funds for long term capital appreciation like child education, marriage (15 to 25 years) 1) Icici balanced regular growth fund 2) Icici value discovery growth fund 3) Franklin high growth companies fund. Risk ability is high.
Are my selection of fund right?
I can invest 1000/month more, please suggest me a fund ?
Can liquid fund be a substitute for bank savings account?

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Sumit

Your fund selection is very good. You may invest Rs 1000 per month in Birla Sun Life Frontline Equity Fund

Kapil B
Kapil B
8 years ago

Hello Nitin Sir,

I am planning to invest in 2 ELSS SIP’s Rs 1000 each/month, current age is 29 risk ability is moderately high…pls suggest.

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Kapil B

1. Axis Long Term Equity Fund
2. Birls Sun Life Tax Plan

Nitin Bhatia
Nitin Bhatia
8 years ago

You have not mentioned type of mutual funds i.e. debt, equity etc.

Ashish Soni
Ashish Soni
8 years ago

Hey Nitin- Your posts are extremely valuable. So here is my situation. I have been always investing in bank FD’s due to the nature of their safe returns. I did invest in ELSS 6 years back, paid up SIP for 3 years, and got nearly 40% return on investment. This has really built my trust on SIP and power of compounding. Now I am looking to invest about 15-20K per month with moderate to low risk funds. I am also confused between Direct & Regular plan. So my questions are:
1. Considering around 2.5L/year investment for 5-10 years horizon, would direct plan make an impact on my returns?
2. Should have have 7-8 funds with 2000 SIP for each, or should I have 3-4 funds with 3-4K SIP each?
3. I also want some flexibility of liquidity, just incase I need funds in emergency.
4. Can you help me suggest some good funds which I can have in my portfolio(Investment horizon: 5-10 years or longer:: Risk: Moderate to high
5. Recommendation on a good ELSS?

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Ashish Soni

1. Not exactly. It is operational nightmare. Fund selection should be good
2. 3-4 funds
3. You may invest some amount in non-ELSS equity funds for liquidity
4. Your preference (Funds types i.e. Large cap, mid cap, Balanced, Debt etc)
5. Axis Long Term Equity Fund and Birla Sun Life Tax Plan

Ashish Soni
Ashish Soni
8 years ago
Reply to  Nitin Bhatia

Hey Nitin- Thanks for your valueable inputs. Apart from Axis Long Term Equity and Birla Sun Life Tax Plan, which are the other 2 funds I should have in my portfolio with moderate risk?

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Ashish Soni

The fund selection shared by you is good to go.

Ashish Soni
Ashish Soni
8 years ago
Reply to  Nitin Bhatia

Thanks Nitin.

Ashish Soni
Ashish Soni
8 years ago
Reply to  Nitin Bhatia

Nitin,
Please let me know your thoughts on the following portfolio:
1: ELSS: Axis Long Term Equity Fund(Since it has got lower expense ratio and higher AUM as compared to Birla Sunlife Tax Plan): Plan to invest 4k/Month thru SIP
2: Long Term 10+ years: Franklin High Growth Companies(choosing it over Birla Frontline Equity & ICICI Balanced Fund, since it has got better 5 years return as compared to the two): 4K/Month SIP
3: 5-10 Years investment horizon : Sundaram Select Mid Cap & ICICI Value Discovery: SIP 4K/month
4. Retirement/ Child Care : UTI CCP as compared to SBI Magnum, Franklin Pension & ICICI Child Care) : Based on Value Research ratings and lowest expense ratio): SIP 4K/month

Do let me know if I am in the right direction?

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Ashish Soni

Your fund selection is good.

aruna
aruna
8 years ago

Hi nitin
my brother is working in qatar since two years,he wants to invest in mutual funds in india,amount 10,00,000 rupees.after 5 years he wants to sell them. is there any tax deduction,or tds applicable for that mutual funds

Taqiuddin
Taqiuddin
8 years ago

Hello sir,

What is your take on rebalancing a portfolio. Can you suggest steps how and when one should rebalance .

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Taqiuddin

You can rebalance but should consider its tax implications. Rebalancing depends on multiple factors i.e existing portfolio, risk appetite, current market conditions and other factors.

Taqiuddin
Taqiuddin
8 years ago
Reply to  Nitin Bhatia

Thanks for your response. I want to know in rebalancing if I am using threshold rebalance techniques do I have to exit from one fund and reinvest in other fund so its rebalance as I wanted.

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Taqiuddin

That’s correct. Under threshold re-balancing, you need to exit from one fund class to reinvest in another fund class.

Taqiuddin
Taqiuddin
8 years ago
Reply to  Nitin Bhatia

Thanks again for your insights and support.

Taqiuddin
Taqiuddin
8 years ago

Hello sir,
What is your take on rebalancing

Arun
Arun
8 years ago

Dead Nitin, Thanks for wonderful insights on MF here.
I am willing to invest in MF with moderate RISK and my age is 34 and gross income is close to 80K per month. I have ICICI Prudential Maximizer which is an ULIP (20K is the premium per annum) but want to put some money into MF (ELSS). Could you please suggest in this case.

Arun
Arun
8 years ago

Dead Nitin, Thanks for wonderful insights on MF here.

I am willing to invest in MF with moderate RISK and my age is 34 and I can invest atleast 5K per month after paying EMI and other expenses. I have ICICI Prudential Maximizer which is an ULIP (20K is the premium per annum) but want to put some money into MF (ELSS). Could you please suggest in this case.

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Arun

I will invest in Axis Long Term Equity Fund, Birla Sun Life Tax Plan and BNP Paribas Long Term Equity Fund

Arun
Arun
8 years ago
Reply to  Nitin Bhatia

Thanks a lot. I have deleted my original post because it had an incorrect spelling. Thanks a lot.

Gaurav Kukkar
Gaurav Kukkar
8 years ago

hi..
I am 27 years old and working in govt sector. I have set up following two SIPs:
1. SBI Bluechip fund 2500 pm from past 6 months
2. Axis long term equity fund 5000 pm from past two months.
I am planning to invest 3000 pm in Mirae Asset emerging bluechip fund. My goal is wealth creation in 5-6 years. Can you please comment on my portfolio so far and suggest me a suitable portfolio other than the funds i mentioned.
Thanks

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Gaurav Kukkar

Your fund selection is good.

Gopal Sati
Gopal Sati
8 years ago

Hi Sir,
Iam 35 yrs old. Lack knowledge of share market, i can invest 10-15K/months, Please suggest the right short term Mutual Fund with moderate risk as per current market.

My Goal to Buy a home which is nearly 30 lac in Delhi hence Someone from bank suggested me to go with mix of equity and debt oriented balanced funds which is for 5 or 10 yrs to get good return.

Need your suggestion.

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Gopal Sati

You may shortlist some good mutual funds depending on your risk assessment then we will select the best.

Hari
Hari
7 years ago

Hi Nitin,

I am 30 years young :-) new to Mutual funds. I am planning to invest 1000/month in 4 funds for long term capital appreciation like child education, marriage (15 to 25 years). I can invest 10-15 years. Mine is 60% moderate risk and 40% High risk intention. I am not going for SIP and palnning Value investing every month. My plan is as below
1. Franklin Smaller companies – Direct Growth
2. SBI Blue chip Direct Growth
3. Birla Sun Life Frontline Equity Fund – Direct Growth
4. SBI Magnum multicap – Direct Growth

Is this work out? If not please suggest your valuable idea

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Hari

My apologies but as i am not a certified financial planner therefore cannot suggest mutual fund schemes.

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