To qualify as an intelligent investor, you must have quality time and the energy to undertake your own investment research. Defensive investors on the other hand, prefer to rely on another individual to carry out this research and make recommendations. Following are 5 intelligent ways for mutual funds investment.
1. Chasing performance
Many people tend to make the grave error of chasing performance of mutual fund managers on a quarter on quarter basis before deciding on mutual funds investment. But, the fact remains that even sterling performance for a few quarters in a row does not guarantee similar performance for the fund over a full cycle of 3 to 5 years.
Conversely, a fund manager with a couple of bad quarters but a more impressive long term record is likely to be a better choice. A mutual fund manager’s investment skill as opposed to luck, is best measured across a market cycle between 3 and 5 years.
2. Calibrated inflow/outflow of funds
Rapid inflow or outflow of funds can potentially hurt the performance of the mutual fund since the fund manager may be forced to find new investment opportunities or sell at a discount to pay for redemption.
In other words this can lead to forced sell/buy decisions that are not governed by the intrinsic value of the stock/bond at the going prices.
Read more- Determine Portfolio Churning
3. Due Diligence
For mutual funds to qualify for a ‘buy’ it should have a long term track record, a reasonable fee compared to its peers, have a management team that has consistently delivered over a fair length of time, and exhibit an ‘out of the box’ approach. Using these parameters you can arrive at a reasonable prediction on the future performance of the mutual fund.
In arriving at the prediction for mutual funds investment the information available should be examined to arrive at the performance of the fund in an upcoming market cycle.
4. Choosing between debt/equity/ balanced funds
This is perhaps a tricky area and your own specific needs and preferences will influence the decision. Debt funds offer consistent returns though they are just about average.
A balanced fund on the other hand uses a mix of debt and equity instruments for mutual funds investment.
The third option is equity based mutual funds where the return on the mutual funds investment is in tandem with the market movements
5. Importance of homework
Like any other financial investment decision, focused home work is very important in the case of mutual funds investment too. The research will cover more areas as compared to individual stocks. Depending on the type of mutual funds India that you choose, you may need to understand the general stock market trajectory, the composition of your investment in mutual funds between balanced funds, debt funds and equity funds or index funds.
More importantly, investors choosing debt funds can only expect fixed returns and cannot benefit from market volatility. The longer tenure over which some of the balanced funds and equity funds become attractive is another factor that will potentially influence your decision.
Featured tool- Mutual Fund Screener
At the end, it is your ability to determine the entry and exit points that will help you extract the best out of your investments in mutual funds.