equity mutual fund investment, selects active equity mutual funds; Avoid this one important mistake, it will benefit – things to avoid before selecting active equity mutual fund CB News

Arun Kumar, Mumbai: Buying and selling an active equity fund based solely on current performance usually results in a very short investment experience, plus long-term returns. Active equity mutual funds may differ in their portfolio index (depending on fund strategy) depending on their type. As a result, performance can be either good or bad compared to the index.

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All of the investment strategies (even if their track record is long-term success) are sort of going through stagnant performance for a temporary period of time, contrary to the criteria. Often a short performance period can be prolonged. This is the main formula for comparing funds with good performance and weak performing funds.

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If a fund is performing below the benchmark for 3 years, 5 years and 7 years, check

– Continuity involved in investment strategy and process. Is a fund sticking to a strategy?

– Is the trend of such low performance seen in other funds and is its investment style the same?

– Does the fund have a long track record (over 10 years) of outperformance?

– Has the fund continued to perform in the past period?

– Did the fund fall short of the norm when the market collapsed? (Rough proxy to understand the risks in the fund)

– What changes have taken place in the fund manager?

– Did the fund go too long and have size limits?

– Did the fund provide clear and transparent reasoning about the approximate performance?

While there was consistency in investment style and strategy, it was observed that other similar funds performed approximately according to the same investment style, with no significant changes in the fund management team. The long-term track record remained that of outperformance for the long term. In a market cycle, which appears to be declining, usually when the market falls, there is no size limit and there is an honest and transparent dialogue explaining the funding policy, in this context approximate performance can be accepted as a natural part of the process.

How long does it take for an investor to exit if performance continues?
Generally, if a good fund (satisfactory in all conditions) is performing on a temporary basis, wait 3 to 5 years to see if the performance improves. If the fund is still performing well or you have found an alternative fund of the same style, but if it is performing well, you should opt out of the performance fund.

The ideal period covering the entire market cycle (usually around 5 to 8 years) – including bull phase, bare phase and recovery phase, is considered a good period, in which long-term performance evaluation of the fund is possible.

(The author is the Head of Research at FundsIndia. The opinions in the article are personal.)

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