How to select a mutual fund – Part 2

Continuing yesterday’s post

7. The asset management company’s team is important too! Look for experienced teams where the managers have gone through a few business cycles. Managers who have not seen a down market can be very myopic, and those managers who have been through a prolonged slow down very pessimistic. You need a nice blend in the team.
8. True to label: When you buy a large cap fund, you are buying a large cap fund, simple. If a fund says it is a large cap fund it should not be buying mid cap, small cap etc. just because large caps are currently out of favor. It is your choice to be in a large cap fund and your fund manager should respect it.
9. Philosophy matching: Some fund houses are cooler and calmer compared to the others. See which philosophy suits you. For example Templeton says Franklin India blue chip is a ‘growth’ oriented, large cap fund, whereas Templeton India Growth fund is a ‘value’ oriented fund – see what suits you. Hdfc mutual fund on the other hand does not classify itself into ‘growth’ or ‘value’ labels.
10. Fund management is by a team or a star fund manager: Fund management is a part science and part art. The fund manager will surely leave a stamp, however, some fund houses have been able to create teams and systems to handle the departure of fund managers – this gives you greater peace of mind. A star fund manager could leave or even worse just drop dead – and you keep wondering ‘now what’! Internationally and in the Indian context well performing funds (over say 10 years) have seen very stable management teams and CIOs.
11. Over extremely large periods of time it is really difficult to beat a well managed index fund. Currently all fund houses show schemes beating the index, but beware of mathematics! All fund houses put a small * and say calculation does not include loads. Do a small calculation if loads are included just too many schemes would have under performed the indices. So if you are not looking for too much excitement look for a index fund with fund charges south of 1% per annum.
12. Index funds with the sensex as a benchmark are at least theoretically supposed to be more aggressive than an index fund with nifty as the benchmark. Frankly it does not matter – if in doubt split your investment amount. The co-relation between nifty and sensex is quite high.
13. When selecting a large cap equity fund choose ones with as broad a benchmark as possible. It is better to choose a fund with CNX 500 as a benchmark rather than say the sensex. Fund managers may have a greater flexibility between large caps, small caps, etc.

14. Do not chase performance. The fund which has performed well in one quarter may not perform well in the next quarter. Funds with a good long term top quartile performance is far superior than to a fund scheme which has one top position and one bottom position. Remember long term investing is like running a marathon – stamina is more important than speed.
15. At the top in the well run large cap funds are Hdfc top 200, Dsp top 100, Principal Large cap fund, Franklin India blue chip, and Hdfc Equity fund come to attention. This list is not exhaustive and many fund distributors and banks have their own favorites. This list passes the test prescribed above – of good consistent returns, good long term performance, team going through a bull phase and a bear phase, true to label, etc. Importantly as the fund size has increased these schemes have reduced the asset management charges and thus improved the total return to the investor.
16. Invest only by the SIP mode especially if you are investing for a period of say 5 years. If your investment horizon is upwards of 7 years even a lump sum would do – but seeing ones portfolio hurts!

The most important thing, like John Templeton said ‘Start with a prayer, it helps!’.


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6 Responses to “How to select a mutual fund – Part 2”

  1. Hi Subra
    I dont know why, but it seems your point # 8 and 13 contradict each other.
    What do you think about it?

  2. Subra, if the really poorly performing funds (we know them, hence not necessary to take names) also manage to deliver about 20% XIRR over 10 yrs (SIPs) and above periods (the Nifty has actually delivered 11% over 16 yrs without LOAD), does it really matter which fund you choose for a long-term SIP. I have read your 2-part posts carefully and I have no dis-agreement on any observation, but end of the day, an investor who has understood the long term behavior of markets and continues to invest consistently bereft of emotional highs/lows….he is always likely to emerge a winner irrespective of the fund he chooses.

  3. great case of survivor bias. You are picking up the most successful funds (that is why they survived). You should go back to 1989 and see what would have happened if you had invested in all THE SCHEMES present then. MFs are run by smart people – when a scheme does badly, they merge it with some other scheme. Hiding the evidence of poor performance is easy. So a weighted average investment (on the basis of the aum) in all the funds in 1989 till today would have given u a terrible return. MF in india are refusing to cut costs, and have no marketing strategy. So hdfc top 200, hdfc prudence, hdfc equity, fibc, tigf, pru i discovery….continue to be my favorites.

  4. Hi Subra,
    Thank you for two wonderful posts. I am having a feeling like sticking to an index fund and probably HDFC top 200 will be a better option. I have another qn to you, if you feel like it should not be put as comment.. plz reply to the mail ID, I had put in the comments. In many of your posts I have seen you mentioning about a portfolio manager, do you mind disclosing who is your portfolio manager/ which firm ? Thanks in advance.

  5. Hi.
    Nice posts.
    I have question though.
    how and from where can i find the asset management cost of a MF(any MF)?

  6. can you please define “extremely large period of times” in the paragraph “Over extremely large periods of time it is really difficult to beat a well managed index fund. ………..”

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