Information on anything, yes almost anything is available at our fingertips. We investors are blessed to witness this jet age of information technology. And interestingly, to add further icing to the cake, all this information is available absolutely free.
In the domain of providing financial services and advisory too, the situation is no different. There are host of website hogging to provide information. While many of you may consider that as a valuable service, have you ever wondered whether that’s helping you to add wisdom or it’s just pure ‘information overload’? In our opinion, it is vital that you investors’ recognise that wisdom stands at the pinnacle, whereas information is positioned much below (see chart above). And for you to make wise decisions what matters is wisdom.
While investing, all of you have relevant questions to ask such as – Where to invest? How much to invest? What should be the investment horizon? etc.; but in order to take a wise investment decision it is vital to assess which resources you tap. This assessment is relevant because for you to take wise investment decisions, you need to tap that resource which provides wisdom rather than just pure information overload, which still keeps you hanging on what to do with your investments.
Today with several investment instruments available, the task of doing prudent investment planning is furthermore difficult, because you are surrounded with host of information around several investment instruments such as Stocks, Mutual funds, Bank Fixed Deposits (FDs), Non Convertible Debuntures (NCDs), Corporate bonds, Public Provident Funds (PPF), National Savings Certificate (NSC), etc., but at the end of it you are still wondering whether you have made the right investment decision. Why? ‘ Because there are several people who have been influencing your investment decision, right from your family members, friends, websites, mutual fund distributors, agents, brokers etc – and mind you everyone has their own view, which often adds to confusion.
In order for you to remove this anarchy caused by ‘information overload’, what is required is capturing the pinnacle of wisdom through an investment advisor who provides independent and unbiased financial advice, keeping his vested interests (of commissions) at bay. Never mind if he charges you a separate advisory fee, as long as he can help you capture that pinnacle of wisdom which would assist you to do prudent investment planning.
We are sure that many of you investors in the past have had horrendous experiences with your investments. Let discuss of mutual funds in detail. In the year 2006 and 2007 when the equity markets were on an upswing, there were several New Fund Offers (NFOs) lined up by various Mutual fund houses. Several cities were painted with attractive ad campaigns enticing you to invest. Mutual fund distributors / agents / relationship managers too tempted many of you investors to invest in equity mutual funds, giving a favourable picture.
But suddenly all these schemes promoted in great gusto lost their charm during the downturn of the equity markets of 2008 and eroded wealth for you investors in a manner that you almost lost confidence of investing even in those mutual funds which have a consistent track record, and those which follow strong investment processes and systems.
Please recognise that with 4000 schemes floating around in the market the task of selecting winning mutual funds is rather complex not only for you, but even your mutual fund distributor / agent / relationship managers. And mind you the exercise of selecting winning mutual funds is much more than just assessing past performance. It is also only exhaustive research which can help you in selecting winning mutual funds ‘ create wealth for you, and not the excitement created by some mutual fund distributors / agents / relationship managers or even the business channels.
While all the Mutual fund distributors’ / agents / relationship managers claim that they subscribe to research habits, you need to ensure that they consider the following research aspects, and provide independent and an unbiased advice.
1. Performance:
The past performance of a mutual fund scheme is important to broadly assess which mutual fund schemes should form a part of your portfolio. But mind you it is not ‘the most’ important factor to select the right mutual fund schemes for your portfolio, because we believe that past performance is not everything, and it may or may not be sustained in the future. While analysing past performance what’s needed is assessment of ‘performance across market cycles’ which can help you recognise how a fund has performed during times of equity market turbulence as well as a boom. Moreover, you need to consider the following points while selecting winning mutual funds: Click here to check the performance of Mutual Fund
2. Peer comparison:
A fund analysed in isolation does not indicate anything. Hence, its performance must be compared to its benchmark index and peer group in order to construe its supremacy in the category. Again, one must be careful while selecting the peers for comparison. For instance, it doesn’t make sense comparing the performance of a mid-cap fund to that of a large-cap. Remember: Don’t compare apples with oranges. Click here to compare up to 5 mutual fund funds across varied time frame
3. Time period:
The key to wealth creation is long term investing. Thus while selecting mutual funds (especially the equity oriented ones) for your portfolio; you need to judge the long-term performance. Besides, it is equally important to evaluate how a fund has performed over different market cycles (especially during the downturn). During a rally it is easy for a fund to deliver above-average returns; but the true measure of its performance is when it posts higher returns than its benchmark and peers during the downturn.