Which is the best mutual fund to invest and why?

Best Mutual Funds to Invest

Do you think that there is a method that will allow you to invest in mutual funds (MF) which will give the best returns in the future?

Is there any way you will be able to choose the best MF every time? We will learn about him here.

Often in an effort to select the best MF, we do 2 things -

First, we look at the star ratings of MFs like Crisil.

Second, we look at rankings in the last 1 or 2 years, with the funds giving the highest returns. 

We start thinking that the fund that has given the highest return is the best. When we buy a fund by looking at the star rating, we should always keep in mind that many people like us see the fund's star rating and buy it. 

When a fund gets a good star rating, a lot of new investors come to that fund and invest their money. Now it has become very difficult for the fund merger to manage such a large new corpus. 

When stocks become very expensive in the bull market, intelligent investors do not buy them. But a fund manager cannot do this even if he wants to because the MF law states that you cannot hold more than 35% of MF money in cash.

If the fund has 100 rupees, it will inevitably have to invest a minimum of 65 rupees. If a fund starts getting a lot of new money, the fund manager is forced to invest that money, regardless of whether the fund manager likes the valuation of the shares or not. 

In such a situation, many popular MF managers, at times, have to compromise the quality of the shares. For this reason, older good actors and/or 4 stars / 5 star rated artists may not make high returns in the future.

Now let's talk about why we should not choose a fund based only on the performance of the last 1 or 2 years. 

Sometimes a fund returns 30% or 40% in a particular year. Seeing this, we get greedy and buy that fund in the hope of similar returns in the future. Let us understand the problem in such an approach through a simple example. 

In-car racing, a driver's approach is to drive as fast as possible with no focus on safety and no caution on accidents. As such, he encounters accidents in the middle of many races and is not even able to complete the race. 

But one positive in such an approach is that if he is able to complete the race, he will come first because of his speed. There is another driver whose focus is on safety. Their ideology is "to finish first, you have to finish first".

If you want to win the race, you must first complete the race. Therefore their focus is on security. If the road is curved, it slows down; If one is ahead, he moves carefully and increases his speed during the right occasion.

Why am I giving this example? Many funds carry a lot of risk in the MF industry. In their last 20 years of track record, they have remained under the cast for 15 years. They suffer heavy losses in those years due to their high-risk appetite. 

But in the remaining 5 years, they get good returns due to high risk-taking. Many funds have taken a lot of risk in the last 2 or 3 years and as it was a bull market, they came in at 1/2 place in the rankings for those years.

The problem with these funds is that even if they have given good returns in the last 1 or 2 years, what is the guarantee that these high-risk funds will give favorable returns in the coming years? 

These high-risk funds suffer heavy losses when the market falls. Therefore it can be dangerous to attract a fund only on the basis of its short-term returns. These were the two things we should avoid.

Now let's talk about 4 things that will help you choose a good fund:

Track Long Term Record: For any fund, track its track record of the last 10 years. It is not necessary that the fund is 1 or 2 every year. Instead, we should look at whether the fund remains at the top 20% in its category for each year in the last 10 years. 

A good fund may not be a winner every year, but it must remain above average in all years. This will ensure that the fund is not taking additional risks to become a leading performer in a particular year. Thus it will not do very poorly if the market corrects itself.

Fund Manager is good or bad. Not a fund: It is possible that a fund has discussed above average 1 point in each year of last 10 years. So should you buy that fund immediately? 

Is it very easy to choose such a fund? Definitely not! Let us understand this with an example. The West Indies were once a legendary cricket team. He won the first two Cricket World Cups.

In the 70s and 80s, his team was the best in the world. So, overall their track record is very good. But, considering your past track record, would you consider the West Indies the best team today? No! This is because times have changed.

Similarly, if a fund has a consistent track record in the last 10 or 15 years, whether or not we should invest in that fund depends on the fund manager. Past performance does not matter if the fund manager

How do we determine whether a fund manager is good or bad?

First, the fund's track record must be consistently good in all the years in which it has managed it. Second, if a fund manager manages 5 funds and if only 1 out of 5 schemes have performed well and the remaining 4 have performed poorly, 

I would not consider that fund manager good. It can happen that if you are doing 5 things, you do well in one due to sheer luck. If 3 or 4 out of 5 do well, then I would consider that fund manager good and can trust that person for my investment.

Fund's track AUM: Now we see that the track record of the fund is well, the fund manager is good, the same fund manager has been managing the fund for the last 7-10 years.

The next thing we will focus on is AUM i.e. assets under management. We must find out how AUM has changed in recent times. Has a lot of money flowed into the fund in the last 1 or 2 years? It may be that initially when AUM was low, it was easy to find quality stocks. 

Now if suddenly there is a huge income in that fund, then I will avoid that fund. During such times, the fund manager has to invest that money somehow because he cannot hold more than 35% of the money in cash. 

Therefore he may be forced to buy shares of such good quality. In such cases, future performance will be affected. Keep in mind that large-cap or multi-cap schemes should have an AUM of less than ₹ 20,000 crores; Midcap schemes should not have AUM above ₹ 10,000 crores.

Track Risk vs. Return Record: We should not only monitor returns, but we should also check the Risk vs. Return track record. This is because good returns can be generated by taking high risks.

But the fund manager is the best that can give higher returns with less risk. Generally, large-cap schemes have a lower risk than mid-cap or small-cap schemes. 

If a large-cap scheme has given a 15% return in the last 10 years and a small-cap scheme has given a 16% return during the same period; Then for only 1% extra return I would not prefer high-risk small-cap funds.