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How to select a good fund

By Value Research
Last updated on: April 24, 2006 09:48 IST
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I am 25 years old and want to start investing in funds. Since there are so many variables involved in choosing a fund which parameters should I stress on?

Do you believe I am better off taking a balanced fund compared to an equity diversified fund? Is it true that a balanced fund manager can invest up to 100% in equity and then switch to other debt instruments when he chooses to?

C
an you suggest a few funds that I can start an SIP in? I am looking at an above average, long-term performance and low volatility.

- Gaurav Sharma

The most important thing is the long-term performance record. You should look for funds that have a good performance record over the long-term.

Therefore, the first thing is to avoid new funds and restrict your selection to those funds which have been around for at least three or more years.

Go for those funds which have performed well consistently in comparison to their peers as well as their benchmarks during bullish as well as bearish phases.

Let's say a fund has the Sensex as its benchmark. In this case, you should look at how much the Sensex has risen and if your fund has delivered higher returns. Or, if the Sensex has fallen, did your fund fall by a lesser percentage?

On our Web site, we categorise funds by star ratings (one star onwards with a five star rating being the best) that take into account returns and risk.

Apart from this, see the investment objective of the fund to determine whether it focuses upon a particular sector or capitalisation or theme, and whether this suits you or not.

For example, if you think mid-cap funds will be too volatile for you, avoid the funds which have a mandate to invest in only the stocks of smaller companies.

Also keep in mind any recent events that may call for a wait and watch approach before deciding to invest. For example, a change in fund management or a change in the fund objective.

If you want to stay away from higher volatility of pure equity funds, then balanced funds will be a suitable option.

Balanced funds are safer than all-equity funds as they invest about 40% of their assets (total investments) in debt (fixed return) instruments which are not as volatile as stocks.

Therefore, the downside potential gets reduced (amount by which the Net Asset Value can drop). But, simultaneously, the upside potential is also curtailed (amount by which the NAV can rise).

All balanced funds have a stated asset allocation that defines the band within which the allocation to debt and equity instruments will move. These limits are generally adhered to. So, they may state they will have a maximum of either 50% or 60% in equity and the balance in debt.

However, there are funds which have the flexibility to move all their assets to debt funds if the outlook turns bearish. Prudential ICICI Dynamic is one such fund.

In June last year, I began SIPs in the following funds. I plan to hold on to them for at least 10 years.

HDFC Capital Builder:  Rs 2,000
HDFC Prudence: Rs 2,000
HDFC Top 200: Rs 2,000
Magnum Global: Rs 2,000
Prudential ICICI Dynamic: Rs 2,000
Reliance Growth: Rs 2,000

I would like to add two more funds to my list:

HDFC Equity Fund – Rs 2,000
Pudential ICICI Discovery Fund – Rs 1,000

Your comments please.

- Mark
 

You have invested in some of the best available funds. HDFC Capital Builder, HDFC Top 200, Reliance Growth are equity funds that are performing well, while HDFC Prudence is the pick of the category of balanced funds.

Magnum Global has also raced ahead in the last two years, and currently enjoys a five-star rating. We categorise funds by star ratings (one star onwards with a five star rating being the best) that take into account returns and risk.

Prudential ICICI Dynamic, though, has lagged, and is currently is a two-star fund. But the fund is trying to make a comeback and its performance in the last year has been very encouraging.

Among the two funds that you plan to add to your portfolio, HDFC Equity is a star performer and arguably the most consistent diversified equity fund.

Prudential ICICI Discovery started off extremely well. But since it is a new fund and is yet to establish itself, it would be advisable to invest just a small portion in it for the time being. Let it prove its worth before entrusting higher amounts to it.

Overall, you have a good collection of funds, and you are also doing the right thing by investing via a Systematic Investment Plan.

Do keep an eye on the number of funds in your portfolio. With the addition of the last two, the count would rise to eight. You should not need more funds.

Rather, keep investing regularly in these funds and review their performance from time to time.

Got a question for Value Research? Please write to us!

Value Research

 

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Illustration: Dominic Xavier

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