Are all Mutual Funds “Sahi” for you? Tips to Pick the Mutual Fund As Per Needs

The Mutual Fund industry is growing in leaps and bounds. Per data from the Association of Mutual Funds in India, the total industry AUM (Assets Under Management) figure has nearly doubled in the past three years, from 10.44 Lakh Crores to 20.40 Lakh Crores as of September, 2017. Inflows into Equity Oriented Mutual Funds last month exceeded 18,000 crores – up 406% year on year.

Fuelling this growth is AMFI’s smartly engineered ‘Mutual Funds Sahi Hai’ campaign. Of late, the slogan ‘Mutual Funds Sahi Hai’ has become ubiquitous – we find It on billboards, in magazines, on websites and even amidst trailers when we visit the cinema! Investors seem to be signing up with alacrity – the total industry folio count recently tipped the 6.20 Crore mark last month.

While the campaign’s message is simple, and its intent noble – investors need to exercise a degree of caution before falling for it hook, line and sinker. Mutual Funds as an investment vehicle undoubtedly surpass traditional investments such as fixed deposits and life insurance in their capacity for long-term wealth creation, but not all funds would be “sahi” for you.

Here are four things to keep in mind to ensure that you select a Mutual Fund that’s truly “sahi” for your individual needs.

Understand Risks – and Invest as Per Your Risk Appetite

Each type of Mutual Fund scheme has a different level of risk attached to it. For instance, small & mid cap equity funds will carry a higher risk than large cap funds or diversified funds. Within the debt fund space, long term debt funds are more volatile than short term debt funds. It’s vital that you take a basic risk profiling quiz to assess your own risk appetite, before deciding which fund is ‘sahi’ for you. Make sure you acquaint yourself with the best year and worst year past performances of the fund that you’re considering.

Don’t be Swayed by Short-Term Past Returns

Another common mistake is take a cursory glance through mutual fund research websites and decide that a Mutual Fund is ‘sahi’ for you, simply based on its 6-month or 1-year return. Remember that short term returns could just as well be the result of a couple of lucky bets that paid off, and may not actually sustain in the future. When selecting a fund, focus instead on its long-term performance – particularly during times that markets headed south.

Avoid NFO’s (New Fund Offers)

NFO’s (New Fund Offers) are usually accompanied by slick marketing campaigns that sway investors into believing that they’ll be missing out on a great opportunity if they do not subscribe during the NFO period. The truth is, there are many open-ended schemes that a lot more ‘sahi’ than NFO’s in terms of their potential to generate long term wealth for you. NFO’s have been notorious at underperforming their peers in the past. And why would you opt for a fund that has no track record of performance, over one that has weathered many a turbulent market storm?

Link your Mutual Fund investments to Your Future Goals

Investing into Mutual Funds as part of a well-defined and balanced Financial Plan can automatically result in the selection of the ‘sahi’ fund for your individual needs. For instance, a monthly SIP being investment made towards your retirement can be channelized towards aggressive mid cap funds, whereas an investment that you intend to part for just 6 months before you buy property, can be invested into short term debt funds or liquid funds. Aligning your Mutual Funds to your goals can go a long way in facilitating proper fund selection.

End Note:

Mutual Funds Sahi Hai, but not all of them may be right for you, personally. First time investors, or those prone to reacting to market volatility, and strongly advised to consult with an unbiased, conflict-free Financial Planner before making investments.