Rather than looking at recent and past performances as a parameter for investing into an equity mutual fund, you will do well to make a mental note of a host of qualitative and quantitative factors that a professional at financial management puts before you before recommending which mutual fund to buy.
Buying the best performing mutual fund of tomorrow is the aim of all investors, as ‘buying low and selling high’ is their credo. Both are next to ‘impossible’. Those who get it right are more fortunate than smart.
A study in the US showed that $1 lakh invested in S&P 500 in 1984 would have become $13.01 lakh by 2000-end. But the average stock investor’s money grew to only $2.41 lakh. Investment guru Marc Faber attributes the underperformance of such investments to the chase of ‘hot’ sectors. Those who don’t understand the dynamics of business should best assign the job to professionals — read professional money managers or mutual fund managers.
For most financial planners, the starting point before recommending an equity mutual fund is doing a financial plan for the client. This involves sitting with the client, understanding his/her cash inflows and outflows, goals and needs. Based on all the inputs, they would broadly classify a client as conservative, moderate or aggressive. Once this classification is completed, recommendation of funds would be the next step.
These recommendations would be based on qualitative and quantitative factors. Take the quantitative factors first. Things like the risk-adjusted returns, sharpe ratio, beta and returns over various periods of time like three-, 6-month, 1-year, 3-year are taken into account and given weightages. Then comes research on the portfolio quality: what percentage of the portfolio do the top 10 stocks constitute? What percentage of allocation is done to various sectors? Does the folio comprise illiquid stocks?, and the like. The qualitative aspect encompasses the number of years the fund house has been around, cumulative experience of fund managers and their past track record.
“Then there are other important things like accessibility and level of comfort with the fund manager,” says Akhilesh Singh, head of wealth management, Emkay Global Financial Services. His final recommendation is done by adding together the qualitative and quantitative parameters. Besides, any fund, which has a corpus below Rs 400 crore and less than a year’s track record, is not recommended by him. The top five funds which find favour with him are HDFC Equity, ICICI Prudential Discovery, HDFC Top 200, UTI Dividend Yield and UTI Equity Fund.
“All decisions taken by a fund manager are reflected in the net asset value (NAV) of a scheme. While selecting a fund we look at NAVs on a daily basis and compare them with their peers over a one-year period,” says Yogesh Kalwani, head-investment advisory, BNP Paribas Wealth Managers. Among large-cap funds, Mr Kalwani recommends, are HDFC Top 20, DSP Blackrock Top 100, Birla Sunlife Frontline Equity and ICICI Prudential Focused fund.
“We recommend funds on the basis of philosophy, discipline and predictability of the performance,” explains Sumeet Vaid, founder, Ffreedom Financial Planners. He believes that in the process of reaching one’s financial goals, stable fund houses are key to investment. So, the equity funds that find favour with him in the large-cap category are HDFC Top 200, DSP Blackrock Top 100 and ICICI Prudential Dynamic Fund. Among mid-cap funds, he recommends Birla Midcap and Reliance Growth Fund.
“Qualitative factors are given a higher weightage than quantitative factors while recommending funds to clients,” says the head of investment advisory at a foreign bank. Though qualitative factors such as investment process, service quality and communication with the investors are strictly not measurable, quantitative performance of mutual fund are.”
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