Monday, February 18, 2008

How to choose a mutual fund

Objective : A step by step guide to choosing a mutual fund for long term investment
Assumption: Investor understands basically how mutual funds work and that they carry market risk, that past performance is no guarantee of future returns and that there is no guarantee of returns blah blah :-)

If you want basic info on funds, please post comments here and I will try and do that in the next post.

Step1. Go to the Mutual Fund section on (or any other finance site you like, this has a great MF section)

Step2. Use the search to find Equity Diversified funds (if you want to look at more specific sectors, factor in that risk and ask yourself if you know enough about the prospects of that sector) by different performance periods (5 yr, 3 yr, 1 yr, 6 months, 3 months, 1 month). In each period, make a list of the top funds.

Select the funds that have consistently good returns. i.e. figure in most of the top lists from step 2.

Step4. Look for how they performed when the markets crashed i.e. over the last 1 month if one is doing this today. All will most likely be negative, so the ones with least losses are probably good :-)

Remove the ones that do not figure in 1 yr top performers AND 3 yr top performers since it indicates they do not have long term performance. One can also consider 5 year returns as a factor if you want to look for really long term good performers.

Step6. This is optional and useful only if you have some idea about stocks. Open the portfolios for each of the shortlisted MFs and see if they have stocks you generally like. This is no use for ppl who dont know A stock from B stock .

You should now be able to decide which ones you want to invest in :-)

I would also suggest buying directly from the mutual fund house rather than from a broker or online banker as you can save the upfront load of approx 2%.

1 comment:

Sri said...

Hey, thats simple and neat, it really helped me get into MFs. It was easier than reading tons of Financial magazines! :)