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How to invest in mutual funds like a pro
Five things you must know before investing in mutual funds and you will be less likely to fret during market ups and downs.
People
Check out the expertise and stability of the fund management team.
Where does the asset manager's expertise lie? If s/he is known for her/his skill as a growth investor, you may not be comfortable with her/him managing a value fund.
How much of experience does s/he have? During this time how has s/he navigated market cycles? How have her/his other funds done?
Is there an in-house investment research team in existence?
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How to invest in mutual funds like a pro
Process
Understand the investment process; don't just take a leap of faith hoping that it will work. Does the fund manager have an investment process that s/he can define and skillfully execute?
Is it evident in the fund's holdings? Does the fund hold well on the downside or dip abysmally?
If there's no rhyme nor reason when the fund does well and when it does not, it could be an indication of an idiosyncratic strategy.
How to invest in mutual funds like a pro
Parent
The pedigree of the AMC (asset management company) matters.
A low turnover of the management team indicates that the fund is able to retain talent and, thereby, consistency. Is the AMC focused on short-term performance?
An AMC which launches gimmicky or trendy funds is likely to be more focused on its bottom line. While it is unrealistic to expect an AMC not to want to make a profit, it's an indication of the company's character -- stewardship or salesmanship?
How to invest in mutual funds like a pro
Performance
The performance numbers must be comparable to the fund's relevant benchmark and peers. Don't compare a mid-cap fund to a large-cap one.
Secondly, take a long-term view, a short-term one is misleading.
Does the fund gain ground by falling less in a down market? Is the performance consistent over market cycles?
Finally, look at the investment process. If the market is momentum driven, a valuation-driven stock selection process is likely to be temporarily punished.
How to invest in mutual funds like a pro
Price
A cheaper fund need not be better. The price has to be seen relative to other factors, such as those mentioned earlier. To ensure that the fund is a viable proposition, compare the expense ratio with other funds from the same category.
Once that is done, opt for the inexpensive one, all other factors being equal.
More than equity, this is all the more relevant in the case of debt funds.