How to become an expert mutual fund investor: Cherry-picking funds

An indispensable ingredient for turning your goal planning into a successful story is to choose the right mutual funds. Some funds take more aggressive positions on the equity or debt side to enhance returns. Of course, this has an impact on their inherent risks and volatility. Hence, investors need to be careful while choosing funds. The ones that have ranked among the top performers in the last one year or so may potentially also lead you to greater swings and risks. So, here is a broad checklist of parameters on which you should focus while picking a good fund. You can get most of this information on the respective fund pages on our website - www.valueresearchonline.com. We believe these broad dimensions should be good enough to help you choose suitable funds for your portfolio: Performance When it comes to a fund's performance, consistency over an appropriate time period is most important. Don't get blindly carried away by blockbuster returns but be guided with consistency with which the fund has performed over the years. Just an above-average fund with greater consistency can very well turn out to be a far superior fund in the long run than the ones with blockbuster returns in fits and starts. Another important thing is to define this appropriate time period because different types of funds have different suitable return periods. For equity, look at returns over five- and seven-year periods on a rolling basis to gauge consistency. In the case of core fixed-income funds such as short-duration and corporate bond funds, look at returns over one- and three-year periods. For an even shorter investment horizon like in the case of liquid funds, look at one- and three-month returns. It is noteworthy that you should use rolling returns during your assessment, as they take into account a series of returns. In other words, it is the trailing return looked at multiple dates (instead of just one) over a period of time. This keeps the recency bias and luck factor out of the picture by focusing on the fund's return consistency. In the case of debt funds, table-topping performance will usually come with outsized risk. We would suggest that you aim for a fund that has been able to consistently deliver better returns than those offered by a fixed deposit or other small-savings avenues with a high-quality and well-diversified portfolio. The objective with debt funds should not be to earn maximum returns but to protect the downside. While the above points lie at the core of performance evaluation, looking at shorter time periods can help you understand the

This article was originally published on December 23, 2021.