Opt for the right kind of fund rather than the best, says Dhirendra Kumar
What are the basic concepts to select the right fund for a beginner?
The first thing is to choose an appropriate kind of fund. For a beginner, it is very important to opt for the right kind of fund rather than the best fund. This is because if you choose an inappropriate kind, then you will be in for a surprise. For example, if you're looking at fairly conservative return and you are not prepared for any big decline, then even starting with a very conservative equity saving fund will be risky for you. Similarly, if you are looking at aggressive growth and invest in a steady aggressive hybrid fund, then it could be disappointing for you. In addition to choosing the right kind of fund, develop an understanding of various aspects like - your investing horizon, your temperament, etc.
Then comes choosing the fund within the category. People look at Value Research's ratings and select a fund but all that we provide at Value Research are just inputs. Nothing is predictive there since we don't know. One looks at our star ratings and gets guided by that but fund ratings are just a nice composite measure of how volatile the fund has been in relation to the return it has delivered that, too, in the past, not in the future. So, a five-star fund can actually become a horrible fund from tomorrow and we can't do anything about it.
While star ratings save you from the hassle of looking at one- , two- and three-year returns, analysing the volatility of the fund, etc, they aren't recommendations to buy. As an initial filtering mechanism, star ratings can be considered. But one should look at other qualitative factors like fund-manager stability and his performance in both the rising and falling markets.
So, I think an appropriate fund, consistent performance, the fund manager's consistency and your own discipline with investments sum up the investing framework for a beginner.