Articles

After the regulator directed mutual fund houses to recategorise their funds, investors can now look forward to standardisation in the structure of funds within a particular category. Individual schemes have undergone several changes, including mergers, change in fundamental attributes and name change, to signify the category they belong to. 

The fund name is what an investor is presented with as a first step and with these changes the hope, among other things, is that you will be able to better identify the category a fund falls into when you see the name. But this may be easier said than done for new or unfamiliar investors. For example, a large-cap fund may have, as part of its name, the words, large-cap or bluechip or top 100, all signifying the same category. 

There is more to a fund than its name. Here are a few things you need to consider before investing in a fund. 

Objective and portfolio

Every mutual fund house puts out details of individual funds and a fund fact sheet on its website, which is updated monthly. Among these details, you can see the investment objective of the fund. For example, the stated objective of an equity fund will mention capital appreciation, whereas it is likely to be regular income for debt funds. 

Match this investment objective with the risk level of the fund displayed in the risk-o-meter and also with the asset allocation pattern mentioned for the fund. A fund, which aims at capital appreciation, is likely to have higher risk than the one which is geared to generate regular income. 

Also, have a quick look at the details of the fund portfolio which will give you an idea of how the investment objective matches with the investments made in individual securities. A large-cap fund, for example, with a top holding in a mid-cap stock or a debt fund meant for regular income with a portfolio highly concentrated in lower-rated debt securities should raise red flags for you. 

Fund manager

Each fund manager comes with her own unique approach to portfolio management and security selection. Along with that, each fund house will have its own processes and metrics they put in place to keep fund strategies consistent. A matching of the two is important for the scheme to deliver consistently in line with its investment objective. If a scheme has seen too many changes in fund managers, then it’s likely that performance consistency and portfolio attributes also change more than required.

It is advantageous for a scheme to have the same fund manager over longer periods of time as her style can be relied on in terms of performance expectation from the fund. 

Performance consistency

While past performance can’t be the primary deciding factor for your fund selection, it is important to consider it.

The absolute performance can change from time to time. On a relative basis, you can see if the fund is beating its stated benchmark consistently over time and whether it features regularly among the top 25-30% in its peer set.

A fund needn’t be the best all the time, but, within its defined category, it should be a consistent performer and at least beat its benchmark.