This is a guest post by Karan Batra.Karan is a Chartered Accountant and lives in New Delhi.

When Recession came in the year 2008, many of us didn’t even know what Recession was and how it could impact the economy. Slowly and steadily everyone realised that the Recession has actually stepped in and the world won’t grow and the same pace as it did earlier.

It’s been a few years since the Recession came in 2008 and it till date the Stock Markets have not turned stable but are still volatile. Highly Volatile markets are the most risky as you never know at what stage to enter as they keep increasing and decreasing at a very rapid pace.

Despite the fact that Mutual funds are safe as compared to investing directly in Shares, but even the Mutual funds seem to have been caught in the ambit of Recession with the NAV’s decreasing constantly. In such circumstances, it is highly advisable to invest in low risk mutual funds such as debt oriented funds (e.g. Monthly Income Plans abbreviated as MIP’s and Gold Exchange Traded funds or Gold ETF’s)

As the fate of the economy still uncertain, it is highly advisable to have such Low Risk Mutual funds in your debt portfolio as Debt Oriented Mutual Funds are low on risk as compared to Equity Oriented Mutual Funds. And in the debt category, short term bonds and ultra short term bonds are even safer.

Despite the presence of such instruments in the market, many investors have either liquidated their investments or are planning to do so, in order to have a portfolio that is more of cash. Though it is not a bad strategy considering the way things have been of late, always remember that your gains would be limited to the Interest the bank can offer you in case you opt for liquid investments like Fixed Deposits. Adjusting for Inflation and taxes, it doesn’t cut a fetching picture at all with your real returns plunging into the negative territory.

Selecting the right Investment

If you are open to taking a significant amount of risk for capital appreciation, equity and equity related mutual funds are your best bet. That means if you are investing in equity MF’s through the systematic investment plan (SIP) route for your long term objectives, do not discontinue the existing SIP’s.

However, if you are conservative and think that the safety of capital is paramount, but still want returns better than what fixed deposits can offer, debt MF’s is the right fund for you. You can diversify across debt paper of varied maturity periods which will ensure safety of capital as well as optimum returns.

This article has been authored by CA Karan Batra who is a finance and tax blogger on http://www.charteredclub.com

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I have awesome readers! Just take a look at the question sent by Shailesh by email with a suggestion that I write a blog post:

I started investing in MFs about 1.5 years back. I use net banking for SIPs. Start of my journey I picked best performing funds using below criteria:

Allocation: Large cap/Multi cap: 60%, Mid cap/Theme: 40%, Total 8 funds
Choice: Check out Value Research Online listing of 5 star and 4 star funds with highest returns in 10, 5 yrs

Totally I invested in about 6 funds with using above principle. Along the way, I picked up 2 NFOs base on their investing principle (ex. Fidelity India Value Fund)…

Now my SIPs have come for a renewal. I tried analyzing who has performed and who has not. On a given date, I could see some performed better than others. I could not select a time frame to analyze them (since netbanking window doesn’t show these details). So technically I have compared them for approx periods and not exact periods. Some of these funds have bettered Sensex returns.

When I go back to the Value Research Online I see none of these figure in 50 Best Performing returns.

So the question is how do I evaluate my MF portfolio? What are the best ways of choosing funds? What is a good tracking window? How do I interpret the best performing funds rankings data?

Before I begin to respond to the questions, let me ask you a few more. Do you get to see such informed questions on TV/Print? Have you been able to comment/give suggestions/disagree on the questions and the answers which are posed on TV/Print? This is the power of blogs which is interactive and transparent!

And I told Shailesh that if he doesn’t like my answers, he can say that on the blog through comments . So can you! Please add to the thoughts by sharing what you know.

My thoughts
1. Tracking: It’s important that when you need to manage something, you need to measure it first. The need for tracking comes out clearly in this issue being faced by Shailesh. From the question, I can assume that Shailesh has a rough idea of the returns as his Netbanking interface does not give out all the details.

I would suggest downloading an excellent MS Excel workbook on tracking Mutual Funds from Chandoo’s Excel Blog: Link. You can easily create a table of all the mutual fund holdings and monitor the latest NAVs (Net Asset Values) to see how your investments are doing.

2. Benchmarking: Each Mutual Fund scheme comes with a benchmark. You cannot compare a debt fund with the returns of the sensex/nifty. The benchmark data is available on the BSE/NSE sites and you can see if your mutual funds investments have overperformed or underperformed.

3. Chasing returns or sticking to your asset allocation?: There’s a thin line difference between the best return schemes and the schemes that is based on your asset allocation principles. Let me elaborate.

Normally, asset allocation means deciding portions for your debt and equity investments. The debt and equity portions perform independently of each other and this makes for the diversification of your investments. Now since the returns from debt and equity investments vary, the total investment returns depend on the asset allocation decision.

In Shailesh’s case his asset allocation decision is to divide his investments between large caps and mid caps. My feeling is that he wants to maximize his returns and does not believe in putting money in debt instruments. Assuming that he has a very aggressive risk appetite, it’s fine with me, though experts recommend some debt investments for diversification purpose.

It is possible that Shailesh choice of 60% Large cap/Multi cap and 40% Midcap schemes can give the best returns. But it is not guaranteed. The largecaps and midcaps performance vary and it can impact the overall returns.

4. The Road ahead: I personally believe that setting up your investment philosophy/asset allocation is more important than chasing the best returns. Because, the top 50 mutual fund schemes change all the time. Imagine that you change your schemes according to the top 5 schemes every quarter/half year. More often than not, you will need to chop and churn your investments every quarter/halfyear!

And chopping and churning has its costs. Your MF Advisor may be the only beneficiary in the chops and churns!

Now if I have to give some actionable suggestions to Shailesh, here it is:

a. Stick to the best performing 5 schemes instead of 8. So you take out 3 non performing schemes.

b. Decide on the investment themes that you believe in and review the 5 schemes and their investment theme. Also check on the Fund Manager’s profile (I personally consider this important).

c. Screen the top 50 MF schemes on the basis of expense ratio, AUM, investment themes and Fund Managers and list another 3-5 schemes for further scanning.

Before I conclude, I must say that this post can help you with a DIY review and that a professional Mutual Fund Portfolio review is also a good option for people who don’t have the time for a DIY review.

How do you review your mutual fund investments? Any suggestions that you can add? Any areas where you disagree?

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