Choice of equity fund.

[arroy_0209]

I am trying to learn investment in mutual funds. If we compare relative performance of the equity-oriented funds:

DSPBR Equity,
DSPBR Top 100,
ICICI Prudential Focused Bluechip Equity (Retail),
IDFC Imperial Equity Plan A,
Reliance Regular Savings Equity

we see that over last five years Reliance RSF equity has given highest return while over last three years this had given least return and over last one year the return is nearly minimum (almost a tie with IDFC imp eqt). Of course I neglect those funds which were not there three or five years ago. Now based on this, is it advisable to invest in Reliance regular savings fund--equity (growth) at present? (I am confused since some broker suggested this and I do not understand why). Suppose investment horizon is for 10-15 years. Is it correct to say that Reliance RSF, though has given best return over last five years, still it lacks consistency and I should avoid it? What is your opinion?

(Since I am trying to understand how to choose one fund out of many, as an example, I have not considered some other good funds like HDFC equity etc.)
Thanks for your opinion.

 

[asterix24]

Hi Roy,

I will try to explain the logic behind my selection of funds, which may be dimensionally opposite to someone else's. The idea is to showcase the decision making process.

First, all equity funds aren't the same. In Equity funds, you have different flavors like Large-cap, Large & Mid cap, Mid & small cap, Multi-cap, Sectoral, Balanced. For a good portfolio, you would require a collection of funds across all these baskets. I have captured some rationale in other threads and would suggest you to read up the same.

Next, now once you have made a decision to choose a fund from a category, you would compare the peers performance, ratings (valueresearchonline ratings are the best), portfolio, fund management, expense ratio etc. One can look at last 3 years, but looking at last 5 years also would help. However, always remember, *Past Performance may not be sustained in future*. Another point to consider is that in last 3 year window, you would have 2008 where there was turmoil. So you may also want to check how much downside the fund took and how positive returns it gave during rebound.

Next, once you narrow down the funds, do compare the portfolio across your funds in other baskets. In most of our posts, Yodlee and I have compared HDFC Top 200 and HDFC prudence which have an almost identical portfolio, though their objectives are different. In a recent post to SOS, I have compared HDFC Top 200, BSL Frontline Equity, Fidelity Equity. You will probably get an idea about the decision logic when choosing one or two.

So, once you narrow down the funds, you can start investing. However, do note that the number of funds and investment spread across them is purely your choice. I also advocate spreading risk across AMCs. For example, there are quite a few good funds from HDFC, but at times, I do suggest investing in a similar fund from a different AMCs.

Investment Horizon shouldn't be confused with fund performance. I don't think there is a fund which you can safely say that it will be good for next 10-15 years (except Bank FDs in current scenario . An ideal way is to start SIP and regularly monitor your portfolio and add/modify funds as per your lifestyle changes. 15 years is a very long time in anyone's life and one shouldn't rest easily after starting investments in year 1.

I hope I have answered your queries. Happy Investing !!