Indian mutual fund market is offering 1000 plus equity and debt funds which are open-ended in nature, further than 51 asset management companies selecting the right funds for self and it includes so many parameters having so much of technical and fundamental aspects of those funds & then to choose it whether it suits you or not can be an enormous job.
Investors who don’t recognize the complexities of various fund style, tactic, and risk management, seek nowadays online guidance to get the correct answer to influence their economic aims, one such way is looking at the rating which in my mind is not less than Rudali of fund management industry, Thus investors need to select schemes after examining the pros and cons of each fund category, the schemes, long term, and short term attribute along with liquidity and what kind of time horizon investor is carrying with objective and the objective of the fund whether it matches or not.
Imperial Finsol is bringing here for you to how you go about selecting the right funds for your investments, please remember that asset allocation is most important aspects when you design the portfolio, here’s a look at the most important filters they apply while choosing funds.
ASSET MANAGEMENT COMPANY (AMC)
While outperformance from the standard is significant, some investors are also keeping a close eye on the pedigree of the fund house. “Imperial Finsol normally takes a top-down tactic. To start with, IFPL looks at the fund house pedigree. Whether the fund house is acting in investor interest or not? Is it complying with all regulations? In the last 4 years, we imperial did not work with 2 or else 3 fund houses purposely looking into their portfolio style and it pays a lot to us. The ownership of the fund house also matters. It should have stable management. When it comes to choosing funds, IFPL looks at the risk-adjusted performance in equity funds. Beta is also an important parameter. We look at consistent performance.
We at IFPL (IMPERIAL FINSOL PVT.LTD.) strongly believe that the process is more important than having any star fund manager. If he quits then its seen in the industry that funds get badly impacted, so is the fund house capable of managing the funds well? To address this aspect we need to make sure that the fund house has a good processed driven and fundamentally strong team, recently one of the big fund houses has 2 big names exited, however, the performance of the funds has not impacted however it has been outperformed the peers, this has because of a defined fund management process, supported by experienced analysts and senior fund managers.
Risk management is top Priority
Most mutual fund houses have a dedicated risk management team that operates independently of the fund management team. This team is responsible for putting in place a proper risk management framework and ensure the fund management team operates within these boundaries. Such processes have become extremely important in light of recent downgrade/credit episodes. Recently in a few credit events of few fund houses have done extremely well and few were the laggard so this is one of the most important criteria when you choose the fund for yourself.
The credit events in the fixed income space have brought forth the importance of liquidity risk and credit risk in debt funds, which have been pushed debt funds as an alternative to FD’s.
Several investors are now trying to invest in mostly safe categories of funds like liquid, overnight, and arbitrage. They are of the view that they might take the risk with equity funds and use debt funds to protect capital. Retail investors look for debt funds for the margin of safety. Retail investors still didn’t digest that even in debt fund can give negative returns and Franklin event has shaken up an entire industry that scheme can get closed as well and fund will get lock-in as well for some time unless the resolution is not getting in place. Debt funds that have a conservative approach towards managing their debt portfolios and have a predictable style and clear thought process. Some other factors are fund size, vintage, percentage of allocation in securities, segment which is liquid & attentiveness risks within funds’ portfolio (to instruments and issuers), expense trends, etc.”
Values & Principles by Ethics
Honesty is the most difficult aspect to find in the world.
Besides fund performance and processes, Investors are becoming increasingly conscious of avoiding AMCs that are too focused on increasing their bottom-line at the cost of investors. fund house delicacies its investors. Is it reducing the total expense ratio (TER) where performance is hard to come by? Some fund houses ask investors to lower their return expectations. As few AMC’s are listed now so they have margin pressure on them to increase their profits than the returns of the investors, but they don’t reduce TER if the performance is slipping. Please escape such AMCs.
Most Important Agenda is Portfolio
The past performance of an equity fund does not guarantee future returns. We track the portfolio of the funds very consistently and we have in house system of cross verifying the funds and funds portfolio with the communication of fund manager and in our view, most of the fund those who get a high rating, won’t sustain long run with that rating, instead, we analyze the current portfolio of funds and the thought process of a fund manager. “Since we have experience in analyzing companies and managing our Broking business too and equity portfolios, IFPL look at the current portfolio of any fund. This gives an idea of how a fund is positioned to benefit in the future. Past performance does not matter to us because it cannot be repeated in the future, and we strongly recommend that do not come in the trap of rating of the fund as you may not even know how they got this rating.
Who Runs Fast, Elephant, or Horse?
Fund leaders frequently say that fund size is not a chief factor of presentation; however, our finding is opposite to this thought. Especially when the scheme size becomes large, we avoid funds that are too large in size. For instance, in Multi cap we invest only in the funds which are anything in between 1000 to 3500 cr., in small and mid-cap, we avoid funds with AUM of more than 2000 crore. In mid-caps, the upper threshold is Rs 2,000 crore and in large caps we avoid schemes having AUM of more than Rs 5,000 crore. We have done an internal study of fund returns over 20 years which shows that smaller sized funds have delivered better than large-sized funds, even where the fund manager is the same. We don’t exit funds that go beyond this AUM upper limit; we don’t add more allocation to such funds. Thus, the fund size has to be not too small and too large either.”
Is that fund getting a regular inflow of Money?
It goes without saying that a good fund will attract inflows while a bad fund will see investors exiting. So, funds that get consistent inflows indicate that investors have a conviction on the fund manager’s philosophy and framework.
“The fund should be getting regular inflows even if the inflows are small. This helps the fund manager look for new opportunities as well as the buying good quality stocks at lower levels by which he can add more value to the Funds. When a fund sees the outflow it dents the overall performance of the fund and the manager has to sell good liquid stocks at a cheap price and give money back to investors.
New fund suggestions remain reasonable
Afterward SEBI’s recategorization standards, there has been a considerable reduction in new fund offers. But are all new fund launches bad? “We don’t mind recommending NFO if the concept is novel, unique and valuer proposition is good looking into the market scenario. The portfolio is good and if it comes from a fund house with is known for its performance then it makes investors more comfortable.
Is the fund manager most Important?
Mostly before I meet with the fund manager, I ask him about the fund style, Proposition, sectors which he is bullish for 3 years down, and how dynamically he will be managing the fund. Whether it is a concentrated approach or more diversified across sectors and most importantly what are overall earnings of the portfolio with a conservative or aggressive approach. We try to know the past track record along with his character and thought process. We believe that manager should be dependable and trustworthy even nevertheless he may not be the most popular fund manager.
When to say goodbye to fund?
No fund can live up to its hopes forever. While short term deficit can be ignored, a steady loss for a continued period is a clear red flag. If the fund is not undertaking thriving, it is advisable to monitor the performance for a year’s time and if doesn’t recover, we believe it is superlative to depart or halt allocating fresh money to such funds.
Just before wrapping up, picking the correct fund for your client is an art & science both. Investors must concentrate on both quantifiable and qualitative reasons while zeroing in on the ideal outlines for self.