The recipe is quite simple. Figure out your savings needs. Choose a suitable fund category or categories. Within each category that you identify, select one or two of the best funds and start investing. That's it. Job done.
Well, not really. I would say that the hard part still remains. Not only that, but it never really ends. I'm referring, of course, to the ongoing monitoring of the funds that you have invested in. Once in a while, good funds become bad, but that's something easy to detect. More often, they become not-so-good. Or, even more subtle, it happens that for a given purpose, the good fund you chose stays good but some other fund(s) becomes better.
Sometimes, these changes are meaningful enough for an investor to switch to different funds even though his or her own needs have not changed. Of course, the funds' own dynamics are not the only factor to consider; there's also the need to make your portfolio changes in a tax-efficient manner. However, the basic problem is still to keep monitoring the funds you have invested in. It's a low, background-level activity but it's not something that you can ignore.
So how do you do this? The blunt answer is that it's hard work and most investors out there will not be able to do it. Not because they are lazy and they will shirk the hard work because they have their personal and their professional lives to live and all this just takes too much time, too much effort, and too much process. Mutual fund investing (unlike equity investing) should not consume a major part of your life. In fact, the whole point of choosing to invest in mutual funds is to stay as hands-off as possible.
However, hands-off is not of much use if it applies only to the stage of choosing a fund. I mean if you invest in a fund and then stay invested in it for five years, then the choice stage is maybe a week-long but the monitoring stage is the full five years. The five years is what actually matters far more in terms of time and effort commitment.
Let's figure out how you will do this monitoring. As I'm fond of saying, that's where Value Research comes in. Specifically, that's where Value Research Premium comes in. Of course, you can just look at our star ratings, which are available on our website to our non-Premium members also. However, the star ratings are a mechanical method, meaning they are driven purely by numbers. By definition, such a method is retrospective in nature and encapsulates no opinion about what might happen in the future.
The 'Premium' research process that we have evolved over the years has far more intense, manual analyses and monitoring of practically all funds. There are about two dozen parameters that our process takes into account, and we evolve these in step with changing circumstances. While the entire system is developed in-house and proprietary to Value Research, let me tell you about a couple of things that will help you understand my point. One is about monitoring debt funds. We monitor debt funds on a range of quality parameters.
One of them is a sharp decline in the assets that the fund is managing. Why does this matter? After all, we have always said that the size of a fund does not matter. The thing is that the size does not matter, but a change in size matters. Being a small fund is fine but being a large fund that is on its way to becoming a small fund is an entirely different thing. Not just that, the speed of the change, as well as the differential from other similar funds adds a layer of quality information on top of size alone. If a fund is declining in size, the decline is relatively rapid and is happening at a time when other similar funds are not seeing anything similar, then it bears watching and investigating. Many problems in debt funds are first realised by large professional investors and watching for signals of distrust can be a useful early warning signal. The important thing is that it's just that - a signal. It does not mean that you pull out your money but that an analyst should investigate and quickly get to the bottom of the matter.
Let's look at another signal - a change in the fund manager. This is relevant to all kinds of funds. Fund managers shift all the time but the patterns are highly variable. Some stay for decades. Some shift because they find better jobs. Some are pushed out because of some organisational issues unrelated to performance and some because they are performing poorly. Some actually move to more senior positions within the same organisation, so while they are technically no longer managing a particular fund, they are very much part of the same system. Therefore, without this layer of additional information on top of just a fund-manager change, it is not possible to make a quality call as to what it means for investors.
This is just a tiny sample of the kind of monitoring that our team does for you and which becomes available to you when you are a premium member of Value Research Online. This is strictly behind the scenes - if you click through to the Premium sign-up page on Value Research Online, you will not figure this out and yet this is the most powerful reason for becoming a Premium member!
So, head over to vro.in/premium, see what else we have for you and elevate your mutual fund investing to a premium level.