It’s very tempting to look at the recent performance of a mutual fund scheme and pick the one that has generated maximum returns over the last one year.

Similarly, many investors fall for star ratings allotted by independent mutual fund rating agencies.

“So what’s the harm”, you might think.

But, here’s something to think about!

[Read: 10 Basics First-time Mutual Fund Investors Need To Know]

Do note that the best performing mutual fund scheme of this year may not necessarily be the top performing scheme in the future.

Or the scheme might have undertaken higher risk to generate superlative returns and might not be suitable for you.

(Image source: pixabay.com)

Here’s why relying solely on past performance and star ratings does not work…

When ratings are assigned to a fund, usually most agencies/institutions give very high weight to quantitative factors such as returns and risk-adjusted returns over a period of 3 years, 5 years and compare it with their peers to arrive at the best return generators in the lot. And changes in the performance cycle can dynamically alter the ratings.

Do note that the quantitative factors are founded on past performance and may or may not hold true in the future.  

While looking at the past performance data of mutual funds is not wrong, assessing the future growth potential and consistency of the fund is very imperative. One should be looking at the portfolio characteristics of a mutual fund scheme:

• Is the portfolio well-diversified;

• The top-10 stocks

• The top-5 sectors

• Average maturity (in case of debt funds)

• Credit profile (in case of debt funds)

• Portfolio churning

Also, it is important to recognise the fund manager’s skills, experience, and the number of schemes he/she manages.

Moreover, if the fund house is process driven ––whether it has robust investment processes and systems in place.

Only if this is diligently followed, star-ratings could make sense. Otherwise, it could leave you bamboozled: you may find your 5-star rated fund mutual fund moving down to a 3-star or a 2-star over a few months and not know what to do with it.

Star-rated funds may be a good starting point for identifying a broader set of investment-worthy funds. But solely going by it may not be an imprudent idea.

In fact, after the capital market regulator’s diktat on mutual fund categorisation and rationalisation, one should not rely much on star-ratings, because a number of schemes have merged, or there is a change in names and there are changes in the fundamental attributes too.    

[Read: Why You Should Stop Looking At Mutual Fund Star Ratings Now] 

If you wish to learn how to select winning mutual funds to earn efficient returns, download and read PersonalFN’s Money Simplified Guide - 10 Steps to Select Winning Mutual Funds

PersonalFN, an independent unbiased mutual fund research house, has developed its own mutual fund research methodology.

At PersonalFN we follow a SMART score matrix:

S – Systems and Processes

M– Market Cycle Performance

A -- Asset Management Style

R - Risk-Reward Ratios

T - Performance Track Record

PersonalFN’s stringent scoring model ensures the scheme is tested holistically. The mutual fund schemes that pass our rigorous test and achieve the maximum composite score on all parameters (based on pre-specified weightages) make on to our recommendation list. 

When you own mutual fund schemes, make sure you thoughtfully select them.

Editor’s Note:

Do you want to select the best mutual fund schemes for your investment portfolio?

Yes?

PersonalFN’s premium mutual fund research service, FundSelect is the answer!

PersonalFN's FundSelect has 15+ years of impeccable track record.

(Source: ACE MF, PersonalFN Research)
Performance as on March 28, 2018
Past performance is no guarantee of future results.

Here’s what one of our subscribers has to say:

"When I look back, the timely advice and assurances of PFN, quite contrary to experts on TV during the last years downturn not only saved me from huge loss, it helped to maximise my return in the cycle. I once again thank you all in PersonalFN for educating common investors and unbiased advice."  - Anup Kumar Guru, Mumbai

FundSelect is been based on one simple motto: “Be steady. Be alert. Be winning.”

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