The market is a roller coaster and let no one tell you otherwise. In the short term the market outlook may seem uncertain due to concerns on oil prices and slowdown on foreign institutional investor inflows.
But on the longer horizon Indian markets look very good. The government has been making conscious business friendly policies; the fiscal deficit too is getting under control. India continues to be one of the fastest growing economies in the world. These factors coupled with many others are ensuring India's position as a global investment destination. To grow personal capital from India's growth one has to choose the correct investment avenue. And choosing an investment avenue is like getting into a marriage, so do it wisely.
Choosing between the plentiful available mutual funds and schemes is not easy. A well thought out and well-planned decision is one that will bear fruits in the long run. Thus a structured approach to fund selection with a systematic checklist to achieve it is of utmost importance.
Even though there are many available methods of product comparisons, one doesn't want to be weighed down by all of them. Dwelling into too many numbers, will only lead to further confusion. Therefore only a few areas of comparison are of true importance and will be comprehensive enough to produce a thorough comparison.
Portfolio
Portfolio is very important while comparing schemes. Even though some of the underlying stocks in portfolios could be similar, most portfolios have differing mandates and investment philosophies. As a result it is rather important to understand the stance the manager has taken while building his scheme portfolio.
The portfolio will not only determine the future outcome of your investment but will also tell you how risky the product is and hence if it is appropriate for your appetite. For example, an equity scheme, which invests in large cap companies, could be safer than one that invests in mid or small cap companies.
The portfolio for debt instruments is determined on duration of securities. A high duration, high return investment is potentially volatile and risky; while a short duration investment Portfolio is less risky. This is where we come to the next parameter of comparison - Risk.
Risk
In today's scenario, investments that generate meaningful post tax; post inflation returns have risks attached to them. These are market risk, credit risk, government policy risk etc. At this point one has to understand how much risk he is willing to take in order to generate higher return. The rule of thumb is that the more risk one is willing to take the better the returns potential.
The measurement for risk to return is known as Sharpe Ratio. The higher the value, the better the risk attached to the scheme is managed. A volatile investment can also be very risky. Thus this aspect must also be quantified. Standard deviation will help us understand the volatility of a scheme vis-à-vis its benchmark. Be aware a riskier investment is not always better and a sure fire way to generate superior returns.
Performance comparisons
These are the most favored methods of investors and amongst the easiest. Performance numbers are available in plentiful. But performance is only measured in hindsight, and can never be guaranteed in the future. Also performance can only be compared across similar categories of funds.
For example, performance or return comparison between an equity scheme and a debt scheme should never be done. It must be kept in mind that comparison happens only between similar funds. A large cap fund should be compared with another large cap fund and not a mid cap fund. Thus compare apples to apples only.
Performance and return comparison should be conducted usually when one has decided on the above-mentioned factors like risk and product category.
Fund management and institutional backing
Since trusting your hard earned savings to some one can never be easy, it is important to evaluate their money managing capabilities. The markets are a game of understanding numbers and involve immense skill to generate growth from these numbers.
Only a very capable person with a lot of experience can generate capital appreciation in today's confusing market swings while managing risk.
Investment horizon
It is very important to determine investments based on one's time horizon viz equity typically being volatile should be considered for investment horizon of 1 to 3 years. While the short term debt schemes should be considered for investment horizons of up to 1 year.
It is therefore important to invest with a fund house with a good track record. It is also important to give due weightage to the quality and track record of the spouses of the fund. After evaluating these parameters and choosing a scheme one can be reasonable sure that the investment they are going into is the right one.
At this point I would like to stress, that any of these parameters could only be a guiding star and not a guarantee for the future. Choosing an investment avenue is like getting into a marriage, so do it wisely. Happy Investing!
Sandesh Kirkire, is CEO, Kotak Mahindra AMC.For more such reports, log on to www.moneycontrol.com
