As a Mutual Fund Investor, one of the topmost thoughts in your mind must be to understand which schemes to select that can build wealth for you!
Selection of Mutual Fund Schemes like any other investment, involves a process of selection after considering circumstances. So what all goes into it?
Understand your Risk Appetite and Time Horizon
Financial Planners /Wealth Managers/Investment Advisors usually use a “Risk Profiler” , a questionnaire administered so they come to know your Risk taking and absorbing ability.
Time Horizon is also part of this analysis process as it is critical to understand before the client is exposed to a particular asset class.
Asset allocation is the process of allocating your money into different asset classes like Equity, Debt, Cash, and Real Estate, Gold and Alternate assets to control risk and generate best possible returns that your risk profile allows.
Your financial Planner will guide you to have the right Asset Allocation Mix between Equity, Debt and Cash and any other asset class
Selection of the right products under each asset class particularly for Mutual Funds involves detailed research on the various quantitative and qualitative factors. Scheme selection merely based on the Last 1 Year, 2 Years and 3 Years Returns is quite naïve as these numbers do not factor in the underlying Risk of the Scheme nor other things that went into generating these returns.
Scheme selection should be based on understanding the risk adjusted return which is usually measured using quantitative ratios like Sharpe Ratio and several others.
You can tell your Financial Planner/Investment Advisor to take these into account while recommending Mutual Fund Schemes for you after factoring in the Risk taken by the Fund Manager
Scheme Review Post Selection
Once you have selected the Mutual Fund Schemes and invested in them reviewing their performance every day or every week is not required as in the short term scheme level performance may vary
Example If you have selected a Small Cap Fund and had originally planned to invest for 5 Years then you may review the scheme performance once every year to check whether the scheme you have invested is doing well as compared to its peers and as compared to its benchmark
Avoid reviewing scheme performance regularly as in the short term scheme performance can be volatile and will not give you the correct picture and you will be tempted to switch schemes which will involve additional cost like Exit Loads and Capital Gains Tax implication These factors will lower your returns
Once you have followed the above steps then all you require is to have Patience and allow time for your Mutual Fund Investments to Grow to help you achieve your goals!