I entered my dentist’s clinic with trepidation. As I “eased” into the chair, she first shared her financial confusion with me: too many relatives were approaching her to buy life insurance – and she finally did buy a policy to help her relative. So my counter question to her was whether they would all help her by getting their root canals done if she asked them to! She got to work on my teeth and hence I could not probe further. But I did think about it and realized that this could be fodder for my next article, and I now seek to explore buying habits for financial products.

Best Performing Mutual Funds?

We often get our clients thrusting publications that display the top performing mutual funds for the last year, and questioning why these funds are not in their portfolio. So I decided to do some investigation myself and came up with results that could put this argument to rest. I suppose that if investors use past returns as the only basis of investing, they could arrive at disastrous results.

Varying Risks

It is important not go blindly by the stated objective of the scheme, but back-check the last 8 quarters whether the scheme has largely stuck to its theme to the extent of 75% or more.

The reason for this categorization (which needs to be verified monthly) is obvious: mid-cap funds will carry larger risks and in good times, generate higher returns. For example, in 2009, the CNX mid-cap index generated 99% returns which not even the best large-cap scheme achieved. Should all investors then have put all their money in mid-cap schemes, ignoring the higher risks?

Pedigree

The fund manager’s past track record is important, but we feel that the fund house pedigree and the systems and processes followed by them are more important. After all, we are not going to move our money with the fund manager all the time: barring a couple of fund houses and fund managers, all others seem to find the grass greener on the other side; and in quick time too. Instead, we seek accessibility to the fund manager, so that we as financial planners who understand our investors’ risk profiles can match the schemes most suitable for them.

Selecting equity mutual funds does not depend on statistics alone. Make sure you invest based on your risk profile and understand the scheme’s philosophy before investing. After all, past performance is no guarantee for future performance.

(The author is the Managing Director and Chief Financial Planner of International Money Matters Pvt. Ltd.)

e-mail: Lovaii Navlakhi

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