With several mutual fund investment options currently in hand, investing in the right fund can be mind-boggling and a challenging. In her latest book, Let’s Talk Mutual Funds, Monika Halan has talked about ways to make the most of mutual funds.
Speaking to ET Now, she said that investor should determine their goals for investing in mutual funds and shortlist funds and schemes according to their future money needs.
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“It’s very difficult for anybody to choose one from thousands. So, you need to reduce your choice set and have a small clutter from which you choose,” she said.
She said that investors will have to place their future money needs, in three buckets.
i) Money which will be needed within three years
ii) Money that will be needed within three-seven years
iii) money that the investors don’t need for seven or more years.
“Once you have done that, then you start the process of shortlisting categories,” she said.
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She said that SEBI has classified open-ended funds in 37 categories. There are 11 in equity, 16 in debt and 6 in hybrid and four more.
“You don’t need all 37 categories. You will need may be a maximum of 10 categories across equity, debt and hybrid,” she added.
“In the debt category, you will place your short and medium term needs. You will have to shortlist categories that best suit your holding period and your risk needs,” she added.
Once the shortlisting is done, investors should start the process of selecting schemes.
“For this, you need to divide your needs on the basis of short, medium and long term and then you need to match these with the categories out there. Once this is done go forward with scheme selection,” she advised investors.
What is the right time to leave a mutual fund?
On this question, Halan said that the decision to exit a mutual fund depends on the investor’s asset allocation and investors need to understand this thoroughly.
“This is the split of investment between equity and debt. Debt is the safer part of the portfolio which is meant for needs within five to seven years whereas equity is for the long term and investor will have to fix the ratio of their investments in debt or equity,” she said.
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“All your FDs, PPF, PF come under debt portfolio whereas equity is direct, i.e. stocks, equity funds etc. If an investor has invested 60 per cent in equity and 40 per cent in debt, markets go up and 60 becomes 70, and 40 becomes 30, then the investor should sell equity and bring it down to 60 and add that to debt,” she added.
Commenting on the factors which should be kept in mind which investing in a mutual fund, she said that the Performance mixed with consistency of performance comes on top while investing in a mutual fund. Apart from this, she said that she would prefer funds with large AUMs as funds which have been in operation for 15 years which will have a large AUM.
Speaking of Artificial Intelligence taking over the role of fund managers, she said that at the present moment she won’t trust AI over fund managers.
“A fund manager might use AI to process a lot of data, but a lot of time it is the fund manager’s instinct,” she added.
