Kaunsa Mutual Fund Best Hai!

Selecting a mutual fund purely based on its past performance may not be a logical way to select the best fund for yourself. Instead, funds that match your risk profile and financial goals should be selected. 





Vishal Goenka Director, 
Wealthtree Investments And Advisory LLP 

As a financial advisor, we often come across this question. However, most of the investors tend to make their decisions on the basis of the historical returns of the fund, and the scheme giving the highest returns is the one which often gets selected by the investor. Desiring the best is certainly a rational investing behaviour. But, at the same time, a logical approach needs to be implemented to choose the best among the rest. The investors need to be made aware of the fact that there is no single mutual fund scheme which fits all the scenarios for them.

Following are the basic factors which need to be considered while selecting the mutual fund scheme:

1. Goal-based Planning : It is often said, “if you don’t know your destination, any road will take you there.” So, before starting any journey, you must set your destination right so that you can take the appropriate navigation route to reach it. This is equally important in your financial planning, as your investments must be selected on the basis of your financial goals and the desired time to reach such a goal.

While there are many mutual fund schemes and categories available for the investors, the suitability of such schemes for the investors’ goals tends to differ and each goal with a different duration may ask for a specific product. For example, an overnight fund or a liquid fund may be suitable for parking the short-term surplus funds, but may not be suitable for investing for a long-term goal like buying a house or a car etc. Similarly, a small-cap fund might not be suitable for short-term goals like an annual family vacation, but may be much suited for retirement planning, etc.

2. Risk Profile : The mutual fund schemes must be selected on the basis of the risk profile of the investor. Different individuals tend to carry different risk-taking abilities and hence, the desirable mutual fund scheme for such investors may be different. The risk profiles can be broadly classified into conservative, moderate and aggressive. An aggressive investor can be a high risk-taker, while the risk-taking capacity is the least for the conservative investor. An investor with a risk appetite balanced between these two can be classified as a moderate investor. The risk profile varies from individual to individual, and further, it can vary with the change in age, income, dependents etc.





Different asset classes are also associated with varied risks. So, an aggressive investor may like to invest predominantly in equities, wherein they can absorb short-term volatility,but also come with a potential of higher returns over the long term. Similarly, a conservative investor will be more inclined to invest in fixed income, which may give lower but stable returns and are likely to be less volatile. 

3. Asset Allocation : While it is important to wisely choose the funds in which the future investments are to be made, it is equally important to check where the existing investments are. The review of the existing portfolio also throws some meaningful light on the risk appetite of the investor. It is said, “one should not keep all the eggs in the same basket.” As such, the investor must have a diversified portfolio with different asset classes, as every asset class goes through their own economic cycles. So, the existing portfolio must also be reviewed and proper asset allocation strategy be devised in order to generate better risk-adjusted and tax efficient returns. 

4. Practical Approach with Realistic Expectations : The investors must adopt a practical approach in devising their investment strategy and have realistic expectations in terms of the returns. Assuming unrealistic returns from the investments can indeed derail the investment journey in its entirety. For example, while fixed-income investments may have been generating 9% annual returns in the past, expecting such investments to generate 12% returns going ahead may not be proper. Similarly, if the equities have generated around 16% over the long term, it will be fair to assume 12% returns for the long term investment planning. It is also important that the risk-reward ratio must be skewed in the favour of the investor, wherein one taking higher risk is suitably compensated with a potential of higher returns. 

"The investors need to be made aware of the fact that there is no single mutual fund scheme which fits all the scenarios for them."

5. Investor behaviour : The emotional behaviour of the investor also plays an important role in his investment planning. This can also be related to one’s risk profile, wherein an investor may not withstand even a 10% fall in the portfolio value and may rush to redeem all the existing investments. As such, he may not deserve relatively higher returns and will be better off with a portfolio with low volatility. However, mutual funds also offer several investment options to help the investors avoid making investment decisions under emotional bias, e.g. SIP (Systematic Investment Plans), SWP (Systematic Withdrawal Plans) etc. Such options allow the investor to systematically invest/ withdraw at periodical intervals and hence, these can help control their emotional behaviour. 

6. Taxation : Different mutual fund schemes may be subject to different tax rates. For example, long term capital gain from equity-oriented mutual funds are subject to 10% tax (after Rs. 1 lakh exemption every year), while such gains from debt funds are subject to 20% tax. Similarly, short term gains from equity funds are subject to a tax rate of 15%, while such gains from debt funds are taxed at the same rates as applicable to the investors. As such, investors in higher tax slabs may be willing to invest a higher amount in equity funds, given the preferential tax rates for such funds. Similarly, investors may invest in ELSS with a lock-in period of 3 years to be eligible for deduction upto Rs. 1.50 lakhs u/s 80C of the Income Tax Act.

After carefully analyzing various points discussed above, investors may be advised to invest in specific funds so that such investments match their risk profile and financial goals. Further, a periodical review of the portfolio must also be made, so that it can be ensured that the investor is on the right track to achieve his financial goals. Investors may also contact their financial advisors for a proper and well-planned investment strategy.