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In the short-term, the bouts of volatility would, of course, weigh on the scheme's returns. But recognising if the scheme has been able to manage the downside, particularly in case of an equity mutual fund, is equally important to assess the risk the fund exposed you to.

[Read: Why Comparing Returns to Risk Is More Meaningful!]

When you invest in mutual funds, every investment decision that the fund manager of a mutual fund takes involves a degree of risk. Hence, it is also important to pay attention to portfolio characteristics of a mutual fund scheme, as the fortune of a mutual fund scheme is closely linked to the portfolio it holds. If the portfolio characteristics of the scheme are not up to the mark, it could show up in inconsistent returns.

The fact is, very few investors dispute the importance of a fund manager when it comes to investing in a mutual fund scheme. They hinge the performance of a respective scheme to the fund manager. You may have experienced your mutual fund distributor/agent/ relationship manager trying to persuade you to invest in mutual fund schemes, merely because the respective mutual fund scheme is managed by a star fund manager.

Remember, fund managers don't have a magic wand. And even if they do, over-dependency would not be the right approach. It is important for the fund manager to respect the mandate of the scheme and invest accordingly, not as per their whims and fancies. If they have indulged in momentum playing in the endeavour to clock alpha, but if their bets fall through, it would obviously have a bearing on fund's returns making them look inconsistent.

Ideally, the fund manager should not be indulging in excessive portfolio churning (like traders), but build and hold the portfolio with conviction (like long-term investors).

At PersonalFN, we believe, even though fund managers are perceived to be the face of a mutual fund scheme, one cannot place much reliance on "star fund managers".

[Read: Portfolio Churning -- Good or Bad For Your Mutual Fund?]

When you invest in mutual funds, judge the investment processes and systems followed by the fund house to make the right investment decisions. So, do take note of the following:

• Delve a little deeper in understanding the fund house's investment philosophy;
   
• Check whether a fund house has a dedicated research team backing its investment decisions or if stock picking is done based on whims and fancies of the fund manager;
   
• Weigh the investor services and the degree of transparency, which is also vital for you as an investor; and
   
• Be wary of fund houses which act as asset gatherers in their race to garner more Assets Under Management (AUM) rather than being prudent asset managers.

Your investment success will not depend on how much the Assets Under Management (AUM) of the scheme or the fund house is, but how well those assets (hard-earned money of investors) are managed. Hence, paying attention to the proportion of AUM of the fund house is actually performing, is necessary.

Fund houses that follow robust investment processes & systems can manage the downside better and hold the potential of generating attractive returns in the long run.

Further, note that every mutual fund scheme follows a particular investment style, market capitalisation based on its objective and pre-defined strategy. And each investment style has its own cycle. So, a top-performing fund that made the best in a bull phase of its investment style may end up among the laggards, if the style enters the unfavourable phase. This also results in an inconsistent performance.

[Read: Why To Evaluate Mutual Fund Performance Across Bull And Bear Market Conditions]

You may have invested in a mutual fund scheme/s after it had already made the most of the cycle and generated returns for its investors. To give you an example, the mid and small cap funds posted handsome returns until September 2018, but have fallen more than their large-cap counterparts since then.

Also remember, picking a 5-star rated fund today does not mean it will generate appealing returns consistently in the future. Ratings are not indicative of future performance.

In fact, now after the capital market regulator's mutual fund categorisation and rationalisation norms for mutual fund schemes, there is no point looking at star-ratings (based on historical returns) because a number of schemes have undergone material changes in their styles, market capitalisations holdings, many of them have been merged with another scheme and there have been instances of strange re-categorisations as well. So, it is time to look beyond star ratings and returns when you add the scheme to your mutual fund portfolio.

Editor's Note: If you wish to select the worthy mutual fund schemes, I recommend you to subscribe to PersonalFN's unbiased premium research service, FundSelect.

PersonalFN's mutual fund recommendations tend to beat the market by a significant margin over long time periods. FundSelect has beaten the market by over 70% in a decade.

Each fund recommended under  FundSelect goes through our stringent process, where they are tested on both quantitative as well as qualitative parameters.

With FundSelect, you get access to high quality and reliable funds picked by our research team using their comprehensive S.M.A.R.T. score fund selection matrix.

S - Systems and Processes

M - Market Cycle Performance

A - Asset Management Style

R - Risk-Reward Ratios

T - Performance Track Record

Every month, PersonalFN's FundSelect service will provide you with insightful and practical guidance on equity mutual funds and debt schemes - the ones to Buy, Hold, or Sell.

Our aim is to assist you in creating the ultimate portfolio that has the potential to top the market. If you are serious about investing in a rewarding mutual fund scheme, subscribe to PersonalFN's flagship mutual fund research service FundSelect today!

Happy Investing!

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