Mutual funds are one of the best investment options irrespective of your level of stock market expertise. Very few investment options in the market are as versatile as these instruments. By simply investing in the right mutual fund, you can create wealth over the long term. But when it comes to choosing the right mutual fund, what kind of an approach should an investor adopt?
Should you, as an investor, choose a fund that’s performing well and has a good track record? Or should you take a look at the back-end of a fund and analyse the manager’s expertise and credentials before zeroing in on a mutual fund? If these are some of the questions that are running on your mind right now, here’s some information that can help answer them.
Reasons to look at the mutual fund’s performance track record
Here are a couple of reasons why you, as an investor, should take a look at the fund’s performance.
It gives you a lot of insights into the fund
The past performance of a mutual fund says a lot about the fund and how it has handled investors’ money over the years. And so, it is important to look out for the performance metrics of a mutual fund. If a fund has been able to generate reasonable returns even under tough market conditions, it gives you a good idea of how performance under normalized market conditions is likely to be in the future.
Here’s something that you should note. When you’re trying to objectively assess a mutual fund’s performance, always ensure to measure it over a significantly long period of time. This is because a fund’s 1-year or even a 3-year return figure may not actually be a very good representation of its performance. Also, when assessing a mutual fund, it is a good idea to get into the return specifics of each year as well.
It allows you to make an objective assessment of the risk-return ratio
The risk level of a mutual fund changes depending on the mutual fund makeup and its asset allocation methodology. For instance, a fund with around 80% equity and 20% debt falls under the ‘high risk’ category. By analysing the fund’s performance relative to the risk assumed by it, you get the risk-return ratio.
If a high-risk category fund generates only low to moderate returns, it is generally considered to be unfavourable since it has a very skewed risk-return ratio. On the other hand, if a moderate-risk category fund generates high returns, the risk-return ratio is considered to be favourable. This level of objective assessment is only possible if you sift through the mutual fund’s performance metrics over the years.
Reasons to look at the mutual fund manager’s performance and expertise
Now let’s take a look at a couple of reasons why you should look at a fund manager’s ability before selecting the right mutual fund.
It gives you an idea of the fund’s investment strategy
Every fund manager has their own unique investment style and portfolio construction mechanism. For instance, Kenneth Andrade, one of India’s top fund managers, might swear by value investing, whereas another fund manager might gravitate towards growth investing.
By looking into the fund’s management, you can easily get to know the strategy that the manager tends to adopt for the fund. Aligning your goals and objectives with that of the mutual fund is highly essential for success. Knowing the kind of investment strategy you’re backing by putting your money into a fund is possible only when you look into the fund manager.
It helps you predict the future course of the fund
A fund manager’s experience and expertise plays a huge role in the fund’s performance. A manager who is backed by years of experience in the industry and who has enough expertise navigating through difficult waters is likely to do a better job of managing the fund in the long run.
On the other hand, a manager who is relatively new may not have a set pattern in place. So, you may not be able to predict how they’re likely to manage the fund in the near future. You can work around this by getting to know the manager’s market outlook and the kind of strategies they believe in.
Mutual funds are no doubt one of the most versatile investment options in the market. So, what is the right approach to invest in them? Investing a fund based on its rules and performance, or investing in a fund based on the manager’s expertise? It turns out that each of these approaches have their own benefits. It’s best to choose the route that aligns with your long-term goals, your investor profile, and what your views on the stock market are.