Investments in Mutual funds should be made keeping long-term horizon. The choice of fund should depend on the following –
- Time horizon
- Risk appetite
- Market situation
Based on the above parameters, you should decide on the asset allocation among the different categories of the mutual fund. And based on the past performance, select funds in that category for your investments.
Should you continue or change mutual funds?
There is no simple answer to this question. The returns are best when you hold your investments for long term. At the same time, you should be not be holding the wrong funds at the wrong time.
Let’s first understand how does a mutual fund work. Every mutual fund has an investment strategy. The investment strategy defines the category of the fund, meaning what kind of companies the fund will invest in.
There is a team of fund managers who manage the corpus (AUM) on the behalf of the investors. This team buys and sell individual stocks based on their understanding of the market, with an intention of maximising returns.
There are two parts to the selection of the mutual fund –
- Category selection – change if market situation changes
- Mutual Fund– continue unless the fund manager changes or fund’s category changes (happens if the AUM becomes too big)
The selection of the category should be made based on:
- Market situation – is the market valued very high? is there any major political event expected? etc.
- If you consider the market is very high, you should choose relatively large cap investments (Bluechip funds).
- If you have invested in any sector fund, you need to keep a track of the policies/regulations that may impact that sector. Based on these, you may need to change the fund
- Past performance – how has the fund performed in last 1, 3 and 5 years? what was the volatility? how is the fund manager’s track record? etc.
- Select a fund that has seen both up and down cycle and outperformed the market. Such funds you should continue for the long term. Don’t panic with short-term bad-performance.
To know which fund to invest in based on your investment duration and risk appetite, click here.
Watch out for market conditions and if required, change mutual funds periodically (evaluate in 3 years). Within the category, if a fund is selected correctly, stick with it for the long term. Keep an eye on the red flags on the selected funds.