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Strategy Guide to successful MF investing

With the stock market near record territory and rising volatility in global financial markets, there's no shortage of mutual fund advice on how to master the markets. For most investors, sifting through all the advice and filtering out the background noise can be a daunting and cumbersome experience.

However, there are certain basic guidelines which can make your decision relatively easier. To ensure you are selecting the right type of funds that are appropriate for your needs, consider the following Do’s & Don’ts:


  • Determine your investment objectives. Are you investing for preserving principal, generating income, paying for a child's education or saving for retirement? Choose a mutual fund whose objective is in line with your investment goal.

  • Decide the time horizon you are looking to invest for-3 months, 3 years or 3 decades. This will help you assess your risk tolerance. The longer your time horizon, the more risk you will be able to take

  • Consider your Investment stage in terms of life-cycle while choosing a fund. During your working or accumulation years, growth-oriented strategies will attain higher total returns than income-oriented strategies. As you approach retirement, possibly a balanced-oriented strategy may be more appropriate to conserve your accumulated assets. Finally, in your retirement, income and stability would most likely be your priorities, although some growth is also important to help protect against inflation. These are general guidelines -- your return objectives and time horizon should govern your strategy.

  • Assess your risk tolerance level. Which of the following 3 categories do you fall in?
    • Conservative - will accept lower returns to minimize risk.

    • Moderate - will accept average price fluctuations to pursue higher returns.

    • Aggressive - will accept above average price fluctuations to seek above average returns.

  • Answering this question will help you in choosing the right scheme. Before you invest, be sure to read a fund's prospectus and shareholder reports to learn about its investment strategy and the potential risks. Funds with higher rates of return may take risks that are beyond your comfort level and are inconsistent with your financial goals.

  • Read and understand all information in the fund's offer document, Statement of Additional Information, and, if available, its annual report. In case you still have any queries, contact the Fund Company or the Securities Division to clarify the same.

  • As with any business, running a mutual fund involves costs — including shareholder transaction costs, investment advisory fees, and marketing and distribution expenses. Funds pass along these costs to investors by imposing fees and expenses. It is important that you study the fund's fee table and compare the fees among various fund groups before choosing a fund because the fees significantly lower your returns.

  • Analyse your existing portfolio. Study the kinds of funds that are a part of your portfolio – Large cap, Mid cap, Flexi cap, Balanced Funds, Tax planning funds etc. Then see whether the fund you are considering for investment will add any value to your existing portfolio and whether it falls in line with your investment objectives and asset allocation.

Additional Do’s - specific to New Fund Offerings (NFOs)

  • Check whether the NFO really has something new to offer which will add value to your portfolio. Either the investment strategy of the fund should be new or at least it should be a new scheme offered by an existing AMC you are comfortable with. Unless something different is offered it may be prudent to invest in a fund which already has a track record, and whose portfolio, investment strategies and expenses are all known to you.

  • Before investing in an NFO, study the performance of other schemes managed by the fund manager of the NFO, especially during periods of market turmoil.

  • Check the stability of the investment team of the fund house and the number of schemes it is managing. Be careful while investing in fund houses which keep introducing new NFOs in the market at a faster-than-required pace. The AMC’s performance is more important than the fund manager’s background because the recommendations of the research teams of the AMC and the investment philosophy of the AMC ultimately guide the fund managers to invest. Moreover, even if a fund manager were to quit, a good AMC would be able find another competent fund manager.

  • As per Sebi guidelines, mutual funds can charge up to 6% of their NFO collections as ‘cost of the issue’ expenses to the scheme. These include marketing expenses incurred on advertisements, road shows, offer documents, incentives to distributors etc. Since these expenses are written off from the NAV over a period of 5 years, all things remaining the same, an NFO will offer net lower returns vis-à-vis an existing scheme where the expenses have already been adjusted in the previous years.

  • If after doing all of the above, you are still not clear about whether you should invest in a fund, seek our advice and our concerned representatives will assist you.


  • ‘At par’ NAV has absolutely no role to play in your future returns. Do not assume that getting the units of the scheme at par i.e. Rs. 10 means getting it cheap. Whether the NAV is 10 or 100 makes no difference. The NAV of an existing scheme is higher merely for the fact that its’ portfolio has appreciated since the time it built it’s portfolio. Going forward, the returns over a given period of time will be same from an existing portfolio (with a higher NAV) and an identical new portfolio (with Rs.10 NAV). The earlier appreciation of the old fund does not make it expensive. What you should be concerned about is the% fall or% rise. A Re. 1 fall in a NAV 10 fund is the equivalent of Rs.10 fall in a NAV 100 fund. In fact Rs.100 means proven competence and a long track record of capital appreciation.

  • Do not have investments in either too few or too many mutual fund schemes. An ideal number would be between 4 and 10. Your investment should be spread across different Mutual Funds, fund managers, investing styles, expense ratios, portfolio turnover and market capitalization and diversified between equity, balanced and tax planning funds etc. Invest in sectoral funds only if you are very bullish on the sector concerned and have a good knowledge of sector performance.

  • Do not fall for fancy terminology used for marketing any scheme. Be guided by the basics of the fund. If there is any confusion it is preferable to invest in an existing fund with longer track records having similar investment goals and strategies.

Remember, all these factors will have a direct impact on the fund you choose and the return that you can expect to get. It is worthwhile spending some time on them before entrusting your valuable money in someone else’s hands.

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