1. Understanding how to select a mutual fund – By Prof. Simply Simple TM
With thousands of mutual funds to select from, how do you decide which ones are right for you? The most common mistake which investors make is to look solely at past performance of the fund. Markets tend to run in cycles. So a fund that’s hot can turn cold.
So how do you decide which funds to buy? Follow the following steps

2. Step 1 : Consider your financial needs
If you want to …
Then you want a fund that seeks to provide
Typical holdings of the fund
Invest for a goal that’s 5 years away
Growth of capital
Stocks
Receive monthly income
Income
Bonds or cash investments
Invest for current income and growth potential
Growth of capital and some income
Stocks that have above average dividends or a combination of stocks and bonds
Keep your principal safe while earning some interest
Preservation of capital plus some income
Money market securities or short tem bonds

3. Step 2 : Examine the fund house.
Select fund houses on which you have enough faith to invest your money. Identify fund houses that have a strong presence in the financial world and provide funds that have a reasonably long and consistent track records..
Check if the fund house has experienced fund managers at the helm, their experience and track record

4. .
Step 3 : Look for consistency of returns
Look for consistency in performance over longer tenures like 3, 5 and 10 years.
Select schemes that have consistently beaten their benchmark indices and compare reasonably with their peer set over the above time frames

5. Step 3 : Loads and Expense Ratio
Loads : You may to pay a fee each time you sell the fund units (Exit Load)
Expense ratio is the annual expenses incurred by the funds expressed in percentage of their average net asset. Lower expenses benefit you in the longer term. Usually, schemes with higher assets have lower expense ratio than that of a small sized fund.

6. Step 4 : Consider volatility
Check NAV movement to see how volatile a fund has been. Check the Funds beta, R-squared and other ratios

7. Step 5 : Build a diversified portfolio
Select funds that complement one another in their investment styles. If you own a mutual fund which invests in value stocks, to be properly diversified add funds which invest in growth stocks. An investment style box can help you
……………..…….Style…………………
Value
Blend
Growth
Large
Medium
..…..Market Cap…..
Small

8. Investment Styles
Growth Investing : Invests in growth stocks. These are companies which are expected to generate above average annual earnings growth in future years and entering a period of rapid expansion
Value Investing advocates that investors should exploit the difference in price between stock market value and actual value of the company. The focus remains on the price of the stock. Such stocks have low P/E, low P/BV

9. Hope you have understood how to select a mutual fund.

10. Please send your feedback to professor@tataamc.com
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11. Disclaimer
The views expressed in these lessons are for information purposes only and do not construe to be of any investment, legal or taxation advice. They are not indicative of future market trends, nor is Tata Asset Management Ltd. attempting to predict the same. Reprinting any part of this presentation will be at your own risk and Tata Asset Management Ltd. will not be liable for the consequences of any such action.