FINANCE SPECIAL........................ CHOOSING Mutual funds

CHOOSING Mutual funds MATCH FUNDS WITH YOUR GOALS  Mutual funds can help you meet any financial goal.  Find out how to choose the right ones.     If you are keen on building wealth over the long term, mutual funds are the best vehicle to help you do so. They offer equity, debt and goldbased products to cater to varying needs. Moreover, you can build custommade portfolios using mutual funds to meet specific financial goals. For instance, you can use diversified equity funds to create a retirement corpus, equity-linked saving schemes (ELSS) to save tax, monthly income plans (MIPs) to meet your recurring expenses, and so on. CHOOSING THE RIGHT SCHEME How does one sift through the large number of mutual fund schemes and pick winners? Here are the basic parameters that one should focus on: TRACK RECORD OF FUND HOUSE Certain fund houses churn out consistently good results year after year across product classes. They are able to do so because they have highly skilled and experienced fund managers. Others have capabilities in a particular asset class. So do look up the fund house’s track record. FUND RETURN Check the scheme’s performance across market cycles and not just in a particular year. Some funds do exceptionally well in bull phases, but lose out in a bear phase. Also, check the fund’s returns over the 3- and 5-year horizons. Besides comparing returns against the benchmark, also compare them against the category average. SIZE OF THE FUND Opt for funds that are neither too small nor too big. Funds with a miniscule corpus struggle to allocate more money to high-conviction ideas. They could become concentrated in a few sectors or companies, making them very risky. Very large-sized schemes could over time turn into closet index funds (replicate a broad index) after which their ability to outperform wanes. EXPENSE RATIO Expense ratio depends on the type of fund. For instance, actively-managed funds have a higher expense ratio than passively managed funds. Expense ratio also tends to decrease as corpus size increases. However, a higher expense ratio is no guarantor of high performance. So if you have to choose between two funds with equally good track records, go with the one having a lower expense ratio. SIP OR LUMP SUM? One of the best features of mutual funds is that you can invest a fixed sum every month via a systematic investment plan (SIP). This mode suits the salaried class well. An SIP allows for rupee cost averaging: over time your average cost of purchase gets lowered because you buy when markets are both high and low. By contrast, a lump sum investment can be risky. If you invest when the markets are high, and they tank, you might get scared into bailing out, thereby incurring losses. A lump sum investment can yield better returns than the SIP mode in a rising market. But it is impossible to predict when one is going to have such a market. So stick to SIPs.  ETW 131209