Investing just on the basis of past performance has its pitfalls. Take the case of a fund that has delivered 107% returns over the past year, has been around for more than a decade, is among the three mid-cap funds in the industry to have figured in the top 10 in three of the past five years, just on the basis of returns. If that isn’t consistency, what is? And if so, then why does this particular scheme not figure in Mint 50?
Here’s my reason. The fund is very aggressively managed and its portfolios are concentrated. Typically, its investments in top five scrips have accounted for around 60% of its total portfolio. For instance, at one point in time, just its top two scrips accounted for half of its entire portfolio. In other words, the risk is very high in this scheme that has given such great returns.
Kayezad E. Adajania, mutual fund editor, Mint
Which is why we like to use the risk adjusted return parameter to track how funds have performed. And remember, it’s okay if your fund doesn’t feature in the top 10, year after year. Consistency of performance is more important. Here’s why. In the past five years, 29 funds have figured in the top 10 only once, but only seven have made it twice, while only two funds have figured thrice. In the mid- and small-cap space, while 29 funds have figured in the top 10 once, only six have made it twice and three have made it thrice.
The other factor I rely on is performance across bull and bear markets and most funds drop off my radar because they can’t handle bad markets. How well a fund does in bad times as well as good times not only shows your fund’s consistency, it also shows how quickly your fund adapts to good as well as bad markets. It’s difficult- So, I look for fund houses with good risk management practices in place. I also look at cash levels and don’t like funds who sit on too much cash. You give your money for the fund to invest and not sit on. Moreover, as HDFC Asset Management Co. Ltd’s Prashant Jain says, it is the investor’s decision and if she puts money in MFs, she has decided to invest and that is what the fund manager is supposed to do. Last year, there was this foreign fund house that sat on cash all the way from 8,000 levels of Sensex to 14,000 in 2009. Its four large-cap schemes have figured in the bottom 11 this year. Obviously, you won’t see any of them in Mint 50.
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