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Mutual Fund Scheme

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Factors to consider in Mutual fund scheme selection

There will be several factors in selecting the right scheme for an individual.

The importance or weightage that we give to each of the factor will vary from investor to investor and from time to time.

Most investors give higher importance to the past performance. In particular, they get tempted to pick the scheme that is currently performing the best. i.e the one that gives the maximum returns within a scheme category.

Returns are important but should not be the only criteria.

It is our human psychology to go by schemes that give good returns and rope some rationale as to why to buy.

Apart from the returns, there will be several other factors to look at including:

1. Fund size (The higher the scheme Assets Under Management generally, but not always, the better it will be. When it comes to equity schemes, better to look at schemes which have a minimum of, say, Rs. 500 cr. under AUM). For example, Motilal Oswal MOSt Focused Long Term Fund is one of the best performer as of now (37% returns as on 21 July 2017) but its AUM are Rs. 522 cr and barely crosses our cut-off mark)

2. Incremental inflows of the scheme (diff in AUM MoM

3. Expense ratio

4. Fund manager of the scheme (his experience, time since when he is manging the scheme etc.)

5. Time since the launch of the scheme (generally, a mininum of 3 or 5+ years of scheme existance etc.

6. Reputation of the fund house. Motial Oswal might be an old institution but MOST MF is a recently one. Also, expertise in one financial market segment does not mean that they can perform well. For example, LIC MF is backed by LIC which is an Insurance major and JM MF is backed by JM Financials who are popular in the financial markets but their mutual fund schemes are often in the lower-half of almost all categories there are in. Of course reputation does matter but then again, it should not be the sole criteria in our fund selection.

7. Some investors study the composition of the scheme and take investment decisions based on their view of the possible future performance of the underlying securities. This is a good exercise but not an easily repetable one. This is because the fund manger constantly monitors the underlying investments and make changes as deemed fit for the scheme. Hence, there will be drastic changes in the portfolio of the scheme every month. We might closely track the scheme in our initial days of investment but we cannot do this on a consistent basis. A full timer into MFs will definetly do that. In some cases, fund manager takes contra bets that give good returns in the long term at the expense of some immediate under performance. Decoding the mind of fund manager is very difficult. If an investor can successful do that, I am sure he will become a fund manger or an asset manager. ;)

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