My previous post was on my roller coaster ride with mutual funds. I have hopefully learnt from my mistakes and used this learning to develop an approach to selecting and investing in mutual funds. It is not an original or path breaking approach in itself. However it works well for me (based on my personal risk and return preferences).

My expectations from my mutual fund portfolio is around 3-4% extra returns over and above the market returns (including the index funds in the portfolio) net of expenses. I consider this level of additional returns to be quite fair considering the low amount of effort and time involved in managing a mutual fund portfolio.

I have now developed the following approach to select mutual funds. In addition, this is an evolving approach

1. Invest in diversified equity funds with a long history of performance. I typically do not invest in funds with less than 5 years of performance history. The fund should have outperformed the relevant index by 3-4% during the period (net of expenses)

2.Analyse the performance of the fund over one bull and one bear market cycle. This ensures that I am able to see how the fund performed during the bear market and what kind of risk the fund manager was taking during the bull market. There are a lot of fund managers who will ride the latest fad, gather assets and then when the fad passes, the fund would tank completely. I try to avoid such fly by night jokers.

3.Select funds which have beaten the market returns by 3-4 % per annum for the last 5 or more years. Why invest in a fund which cannot outperform the market over the long run and pay fees for that?

4.Check the expense ratios and turnover for the fund. Unfortunately most of the funds in India over charge and only a few have the performance to justify such steep charges. I agree on this with the comments on my earlier posts. I try to select a fund with the lowest expense ratio as far as possible.

5.Check the following additional parameters for a fund. (http://www.valueresearchonline.com/ is a good website for that. It gives a fund summary for most of the top mutual funds)

a.Total asset under management – Should be more than 500 crs.
b.Fund alpha – this indicates the level of outperformance of the fund based on the risk taken by the fund
c.Fund beta, sharpe ratio, standard deviation etc
d.Mutual fund manager profile – how long has the manager been with the fund. Is it a new manager and hence the past performance not indicative of the future performance?. I also try to read interviews of the manager if I can get access to it.

Based on the above broad selection criteria, I have ended up with around 4-5 funds most of the time. After investing with these funds, I tend to check the performance once or twice a year.

4 Comments

  1. Anonymous says:

    Hi,
    Can you tell us what those 4-5 funds that u have selected finally.

  2. Rohit Chauhan says:

    dsp meryll lynch opportunities fund – continue to hold for last 6 years
    reliance vision
    birla sunlife equity fund
    hdfc equity fund
    franklin blue chip funds
    an index fund and Nifty bees – ETF

  3. abhikush says:

    How do you get the data? Is there a website which provides all the parameters you have mentioned?

  4. Rohit Chauhan says:

    try http://www.valueresearchonline.com/ to do the initial filtering. for other details go the website of the AMC itself and read their prospectus

    i think mutualfundsindia.com is a good website too

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