For small investors who want a share of the market action without incurring the imminent risk, mutual funds are the best option. Instead of wracking your brains over stock selection, you can outsource the task to a fund manager, who can work his magic on your portfolio. Is this where your responsibility ends? Not really. Picking a mutual fund may not be as risky as choosing stocks, but zeroing in on the right scheme can be a cumbersome process.
The vast number of mutual fund schemes on offer, coupled with their cryptic, complicated names, are enough to confound any investor. Funds with fancy names, such as Hi-Fi Fund , Progressive Themes Fund , Special Situations Fund and Unique Opportunities Fund , are among the 380-odd equity schemes on offer. As an investor, you need to tread with caution because if you pick the wrong fund, it can bleed your portfolio and drag down its overall return.
How does one sift through the large number of mutual fund schemes and pick winners? Unfortunately, most investors fall in the historical performance trap while trying to do this. Says Vivek Rege, managing director of VR Wealth Advisors: "This habit of looking at short-term fund performance is worrisome. Investors should understand that evaluating performance at micro levels does not signify anything. They should not draw conclusions as it can be misleading."
Choosing the right mutual fund
The blame also lies with the advisers who push certain funds purely on the basis of recent performance. "It is actually the advisers who are obsessed with performance. They have no other ability to bank upon while advising clients," says Sumeet Vaid, founder and managing director, Ffreedom Financial Planners . If performance is not the only criterion, what other factors should one consider while assessing a fund? We have identified a few parameters that should help investors choose the right fund.
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