Don’t fret over MF choices

Selecting the right fund isn’t the most important ingredient to financial success

Most investors seem to believe that they would have a sure-shot recipe for financial success if only they could choose the best mutual fund schemes for their portfolio. “Can I get to a ₹1-crore portfolio in 10 years with schemes X, Y and Z?” is the most common query from investors writing in to this paper for financial advice. But the truth is: selecting the right fund isn’t the most important ingredient to your financial success. The following are other investing decisions that will make a much bigger difference.

When you start

Many of us are so caught up in our careers that we keep postponing our investing decisions ad infinitum. New investors, perplexed by the variety of schemes on offer, may be so petrified of making the wrong choice that they don’t invest at all. But in equity investing, starting as soon as you can is far more important to building a sizeable net worth, than being spot-on with your fund choices.

Consider brave-heart investor A, who wasn’t great at choosing equity funds, but still kicked off a ₹10,000-a-month SIP in a large-cap fund in August 2008. The scheme was ranked a middling 30th out of 50 schemes, and he would have got to a ₹24.8- lakh corpus by today (August 2018). His friend investor B kept researching his fund choices until August 2010, but finally managed to pick the category topper for a similar SIP.

Because of his late start, investor B would today be sitting on a substantially lower corpus of ₹18 lakh. This is despite his equity fund (with a 15 per cent annualised return) beating his friend’s (13.7 per cent) on returns by a good margin. In effect, just a two-year head-start on starting his SIPs gave the first investor a corpus that was 40 per cent larger, even though his fund selection wasn’t great.

If in doubt, start your SIPs with a Nifty50 index fund and fine-tune your choices later.

Allocation, category choices

Many investors pay scant attention to their asset allocation and spend much of their time poring over the return rankings of the schemes they intend to buy.

But consider investor A who was lucky enough to choose the best-performing large-cap fund for SIPs 10 years ago, but didn’t give much thought to his asset allocation. If he had allocated money in a 40-60 mix between equity and debt, he would have had a corpus of ₹18.4 lakh today. But investor B who picked a no-brainer Nifty50 fund but made a consciously higher equity allocation of 70 per cent, would have a corpus of ₹21.7 lakh without much effort. We used the same liquid fund in the debt allocation of both investors.

Here, investor A’s SIP in the star equity fund delivered an annualised return of 16 per cent, far better than the index fund’s 12.6 per cent.

But it was the under-allocation to equities that proved to be his undoing. Apart from asset allocation, the category of scheme you choose, too, plays a huge role in your final portfolio value. So if higher returns are your objective, ensure a mid-cap flavour in your equity investments.

Investing enough

If you commit piddly sums to MF investments, your final corpus will be small, even if you pick chart-topping schemes. Therefore, committing an adequate portion of your monthly earnings to investments is far more important to attaining your goals than selecting star funds.

Aim to save a minimum 15 per cent of your monthly pay cheque and invest it in line with your chosen allocation pattern. And don’t forget to ensure that your investments keep pace with inflation and your income. A young investor who starts a ₹5,000 SIP today in an equity scheme that delivers a 12 per cent rate of return, will accumulate ₹45 lakh at the end of 20 years. But if she manages to increase that SIP by just ₹500 every year, her expected corpus jumps to ₹73 lakh. Given that most of us see pay increases of at least 5 per cent a year, stepping up one’s SIPs at least by 5 per cent a year is critical to get to a reasonable target.

Staying the course

Finally, many of us start our investments with much enthusiasm but fail to persist with them through tough times. Remember, choosing the right schemes for your SIPs is far less important than sticking with your SIPs, through market and career ups and downs over a 10- or 20-year period.

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