How to Choose & Invest in Mutual Funds the Right Way ?

I’m assuming you’ve made up your mind to create long term wealth by using mutual fund as a savings instrument. Sure, MFs are supposed to be professionally managed as Indian Capital Market has had a very bad history of cheaters raising money and committing all sorts of fraud (business loss, fraud, regulation, etc). By entrusting your money with professional fund managers who are paid salary in crores, you expect them to mitigate the risk and generate RoI beating the SENSEX / NIFTY returns by at least 2% in the long run. By Mutual Fund investing, you avoid single company risk as you’ll hold a basket of stocks.

I Follow these Rules and use the SIP and Swing Strategy to Maximize my Returns,

Here are some of the Rules that I’ve decided to stick to while investing my hard earned money,

  • Always Set a Goal
  • Which Funds to Choose – Growth Oriented or Value Investment ?
  • Until 10 years from retirement, stick to Growth Investment
  • Asset Allocation Strategy – MultiCap, MidCap, ELSS, Gold and Debt Fund (I’ve chosen 2 MultiCap, 2 MidCap, 2 ELSS and 1 Sovereign Gold Bonds. No Debt. Choose Funds from different AMCs)
  • Go with Direct Mode of Investment – You earn about 1% Higher RoI
  • Choose AMC & Funds which goes for Bottom up Stock Selection and this will be visible in the 10 / 7 / 5 / 3 year SIP Performance
  • Get Top 5 Performers for the above periods and see by how much percentage they beat the benchmark. Choose the one which have demonstrated consistency in out-performance
  • AUM / Size of the Fund – Avoid ones with greater than 10,000 Crore AUM It becomes difficult for the Fund Manager to beat benchmarks when fund size is Big. Smaller the AUM, chances of Performance is Higher
  • Check for Rolling Returns on MoM SIP if you want to stay invested after 10 years
  • If your SIP has under performed (WRT benchmark & ranks out of top 10) for 3 years, then without a second thought reshuffle following the rules
  • Do not hesitate to redeem. For example a greedy Finance Minister introduced Long Term Capital Gain Tax and said all gains until that day are Grandfathered. So we kept waiting for markets to come back to the level to save tax and then switch to other actively performing funds but that day never came.
  • Sectoral Funds is for the restless and risky – When say a Sector Like Pharma which was beaten down for years, one could participate by investing Lumpsum + SIP Top Ups until the sector begins to move. Once Target is reached, start exit.
  • You can add more rules that suit your investment style and stick to Discipline.
  • Discuss on Online Forums / High IQ Friends, they’re the best critics and never listen to Greedy Distributors

If all the above is too much for you to Study & Monitor, then just invest in INDEX Funds also known as ETFs (Exchange Traded Funds)

DISCLOSURE: I’m not a SEBI registered adviser. Hence, what I do or say need not be considered as investment advise. You are supposed to do your own research and then invest accordingly.