Cherry-pick Mutual Fund schemes – 5 Steps guide

Cherry-pick Mutual Fund schemes – 5 Steps guide


Most investors grapple for authentic investment advice. ”Cherry-pick mutual fund schemes-5 steps guide” is an attempt to help investors make the right investment decision.

Most investors be it a beginner or seasoned investor look for investment advice. Advice is sought to make the right investment decision. The right investment decision is a function of series of steps taken before capital deployment. There are over 2000 + mutual fund schemes spread across 40 plus sub-category of funds. Hence, it becomes difficult for investor to determine the right scheme to invest into. We shall discover the dynamics of cherry-picking mutual fund schemes that is closer to our investment objective and risk appetite.

Steps to Cherry-pick Mutual Fund Schemes

Randomly cherry-picking mutual fund schemes wont suffice to withstand the uncertainty in achieving the financial goal. Cherry-picking best performing mutual fund schemes is not the only answer to achieving the short-mid-long term financial goals. It has to be remembered that the current financial status and end financial goal varies from investor to investor. In consequence to this, its best to follow the certain principals that lays the foundation of authentic investment call. These principals are step by step guide to attain the financial goal with respect to the defined investment objective.

Step 1: Identify Investment objective

The first and the foremost requisite is to clearly identify the short, mid and long term investment objective of the investor. Investment objective could  be Child education, Daughter’s marriage, Retirement fund, Tax saving etc. Learn more.

Step 2: Ascertain Risk appetite

Ascertaining the risk appetite of investor is of paramount importance to fund deployment. It varies from investor to investor. In simple words, it is the investor’s ability to consume the notional loss in investments during the short, mid and long term view.  Learn more.

The notional loss or gain is a consequence to fluctuation in the stock price of underlying securities in a mutual fund scheme.

Step 3: Identify Fund Sub-Category relevant to Investment objective

Once the investment objective is clear and risk appetite assessed, look for a corresponding and relevant fund sub-category underneath Fund category. For instance if investment objective is tax saving then relevant category and sub-category would be ”Equity” and ”ELSS”.  To discover categories, sub-categories and listed schemes under them, click on Fund Performance.

Remember, there are 5 broad categories and under them 40+ sub categories. Each sub categories have their respective schemes.

Next step is to identify the best performing schemes under the respective sub-category.

Step 4: Cherry-pick mutual fund schemes

Investor can cherry-pick mutual fund schemes from the list of schemes under relevant sub-category. To discover categories, sub-categories and listed schemes under them, click on Fund Performance.

Subsequently, gauge the performance of each schemes by looking at the return it has delivered over the 10 year period or since inception. It will offer investor the flavor of consistency of returns of each scheme. Simply, identify the top 2, 3 or 4 schemes under the sub-category as your finest pick to deploy your capital.

Point to remember

One must remember that past performance of the scheme is no indication of the future results. Precisely, why we recommend to pick top 3-4 top schemes in the sub-category to deploy capital evenly. it serves as your portfolio of schemes and thus spreads your risk. Learn more.

Step 5: Pay attention to risk indicators of a mutual fund scheme

Another undismissible step to make the right investment decision is to follow the risk indicators of a mutual fund scheme. Well, how do we do it? Examples of risk indicators are:

(1) Standard Deviation

It measures the range of a funds return.The scheme that shows higher standard deviation signifies that range of performance is wide and hence higher volatility

(2) Beta

Its a measure of scheme volatility against the market volatility. Its measured in 3 ways. Firstly, if Beta is greater than 1, it signifies that scheme is more volatile  than market. Secondly, if Beta is less than 1, it signifies that scheme is less volatile than market. Thirdly, if the Beta is at 1, it signifies that scheme volatility is at par with the market volatility

(3) Sharpe ratio

It measures the excess return over risk free asset a fund provides per unit of risk it assumes. Its a good indicator of risk-adjusted return. Higher sharpe ratio is preferable

(4) Product Label

Its the most important thing the investor should look for. The riskometer in the label shows the risk level of the scheme

The above indicators are incorporated in the fund fact sheet. Each AMC release its Factsheet periodically. Investor can google for latest fund fact sheet of the respective AMC.

Final Comments

We learnt above that simply identifying any best performing schemes won’t help us achieve our financial goals. What really matters is the best performing scheme that aligns  to our investment objective. There are over 2000 odd mutual fund schemes spread across 40 + AMC’s. Moreover, these schemes are classified into 47 odd sub-categories under 5 broad categories. In the event we choose 5 best performing schemes under each sub categories, with 47 sub-categories we will have 235 (47*5) top performing schemes. Should it mean that we need to invest in all of these schemes. It may be quite a preposterous thing to do by any stretch of imagination.

In line with the above, key fundamental to right decision making lies in the adherence of 5 principals laid above.

Happy investing !!

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